Inflation in consumer prices is proving to be a persistent issue. This reality stands in stark contrast to the “transitory” claims made by Federal Reserve Chairman Jerome Powell earlier this year.
Recently, Atlanta Fed President Raphael Bostic has openly acknowledged that inflation is not merely a temporary phase. Although he assures that the Fed will handle it effectively, we remain skeptical.
Rising consumer prices have widespread implications. The added financial burden impacts families significantly, acting akin to a heavy tax that strains already tight budgets. During this ongoing period of stagnation, personal income growth fails to keep pace with surging prices.
Moreover, manufacturers and retailers face their own challenges due to escalating input costs. Some of these businesses can transfer these expenses to consumers, while others may endure decreased profit margins temporarily. However, there are limitations on how much of these costs can be absorbed or passed along before operational viability is threatened.
When the expenses associated with raw materials and labor exceed what companies can sell their products for, it often leads to halting production. This is the business route of least resistance.
Take the fertilizer industry, for example, which is grappling with soaring natural gas prices. As we discussed a few weeks ago, several fertilizer plants in the UK have had to suspend operations due to these rising costs. While U.S. fertilizer producers are not currently halting operations, prices have still increased significantly.
In fact, the Green Markets North American Fertilizer Price Index has recently hit a record high, surpassing the previous peak from 2008. This surge in fertilizer costs will inevitably elevate food production expenses for farmers.
The Food and Agriculture Organization’s global food index indicates that food prices are currently at a decade-high. With North America’s growing season beginning in late March, the higher fertilizer costs could lead to persistent food inflation extending into 2022.
But the ramifications of inflation extend beyond just food. Consider the recent dramatic increase in cotton prices, which has reached a 10-year high. This spike directly contributes to the rising cost of jeans, as seen with Levi Strauss, which has already raised its prices to reflect these changes.
The Ripple Effect of Inflation
In response to these rising input costs, Levi Strauss is adjusting its business model, engaging in aggressive negotiations with cotton suppliers and minimizing intermediaries. Here are a few details:
“During its earnings call, Levi noted that it has already negotiated most of its product costs through the first half of next year at very low-single-digit inflation. For the latter half of the year, a mid-single digit increase is expected, which the company aims to offset with its existing pricing strategies.”
“Levi is shifting its focus from predominantly wholesale to a balanced model with a growing direct-to-consumer segment. Given strong consumer demand and reduced inventory levels, the company has been able to sell products at full price.”
Despite these adjustments, the reality remains: cotton prices are up 47 percent this year. If cotton constitutes 20 percent of Levi’s jean production cost, and the company is managing to negotiate lower product costs, it suggests that someone along the supply chain is experiencing significant strain.
At what point might this party decide they can no longer fulfill their commitments? For cotton suppliers, that could occur when input costs, including land, fertilizer, labor, and processing, surpass their contracted price with Levi.
While Levi may have their pricing strategies under control for now, the question remains: will they genuinely achieve the mid-single digit increase they anticipate later in 2022? How much more can they continuously pass on to consumers?
Preparing for the Repricing of Goods and Services
These questions resonate with management teams across various sectors. The undeniable truth is that when the costs of raw materials and labor rise, it complicates operational planning and production. Although hedging strategies can help mitigate rapid, short-term price spikes, they cannot prevent a long-term rise in material costs.
In essence, we believe that a prolonged repricing of materials, goods, and services is now in progress. Prices will continue to fluctuate based on supply and demand, yet this will unfold within a higher overall price range. History has shown us that such trends occur repeatedly.
For instance, in 1960, a gallon of gas cost $0.31, and a gallon of milk set consumers back $1.00. Today, those figures have inflated to an average of $3.28 for gas and $3.68 for milk—representing increases of over 958 percent and 268 percent, respectively, over the past six decades.
While gas and milk prices may fluctuate downwards temporarily, they are unlikely to revert to 1960 levels. The fundamental revaluation has become permanent.
But why is that? Are gas and milk somehow more valuable now than they were sixty years ago?
In reality, their utility remains largely unchanged. The dollar, however, has experienced severe devaluation, a direct result of extensive dollar debasement policies implemented by both the Fed and Congress.
Another key aspect to remember is that inflation begins with an expansion of the money supply, which is currently facilitated through combined efforts of the Federal Reserve and the Treasury. The Treasury issues new debt, which the Fed acquires using newly created credit.
Congress, through its repeated adjustments to the debt ceiling, grants the Treasury a virtually limitless credit line. This money circulates through the economy, leading to price increases as money supply growth outstrips the available goods.
In summary, through ongoing policies of extensive dollar debasement, we are now entering a new phase in the mass repricing of goods and services. Expectations point to considerable upward adjustments across most sectors over the next decade.
Pre-pandemic pricing is likely gone for good. Your savings, investments, retirement plans, purchasing power, and the quality of life you’ve diligently worked to secure may be severely impacted.
Sincerely,
MN Gordon
for Economic Prism
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