When you right a column such as mine, over a period of time you end up going over some of the same subjects you went over months ago. Maybe I am not that creative after all but be that as it may, Chairman Powell’s speech last Friday brought me back to an earlier column. I believe earlier this year I disagreed with the Fed Chairman when he felt that inflation was not an issue and it was to be expected that you will see some random price hikes. The Fed and the Labor Department both send that prices were rising at a very manageable 2.3% clip and I took issue with that.
One of those rare times where I was 100% right and I continue to maintain that inflation is worse than both the Fed and the Labor Department data shows. I also said in followup columns that price spikes, while unrelenting, will come back to Earth. The Covid excuse and that lame excuse of supply side issues will be no-starters and prices will rebalance. The problem will not not be inflation at that point, the problem will be that prices will not come back to pre-pandemic levels. They will come back to a level where maximum profitability will be achieved.
For example, if a large bottle of olive oil (hey, Im Italian, I go with what I know) was 10 dollars and the combined forces of Covid and supply side BS help push the price of the same bottle of olive oil up to 13 dollars in six months, then that bottle, after Covid comes back to 11.50 a bottle. You still have an overall 15% increase in the price of that bottle. It will never see 10 dollars a bottle again. At the end of the day, you are paying more than you did in January and no supply side fix or end of Covid will change that.
Manufacturers and service providers of every stripe have had a hard time raising prices. Consumers controlled their destiny, apparently with this double whammy, suppliers control their destiny and consumers just have to take it.
Back to the Fed. They do not believe that inflation will be an issue longer term and I just explained very simply, how it will be. The other key component of the Fed Chairmans speech was their continued concern about the labor picture and I read the speech twice and I am still confused. The economy is going all out now yet there are still over six million people on the sidelines. There are Help Wanted signs everywhere and yet there is still 5.6% unemployment. With the Fed portion of unemployment running out next week, some of this slack should get taken up but I think the bigger picture is wages. Companies, because of labor shortages and rising inflation will have to start paying higher wages. Short term, it will just impact the present day earnings of these companies, long term prices will continue to rise.
The imbalances in the economy are widespread and with the Delta variant still a major contributing factor to localities across the country, we really can’t be sure how strong and how long this recovery will last. Throw the mildly veiled references to tapering and the possibility of higher interest rates next year just leads me to think more and more about the possibility of significant correctio.
Not at all, in fact we all see it or should I say, feel it. On another subject near and dear to both of us, If you haven't seen this appox 25min on Axemen by Rick Beato, its worth watching. As we both have opinions of a good axeman, for the first 20 min or so, I wasn't familiar with most, the last 5, super groups, so it was a given but the talent that I hadn't recognized, worth a shot.
https://youtu.be/IsGjP___ufQ