Normally, most investors keep half an eye open for words out of Washington when the Federal Reserve Open Market Committee meets. I think that eye will be fully open to try and discern what direction the Fed may be looking at.
Most Fed watchers believe there will be no change in interest rate policy coming out of this meeting but they will be looking to see what Chairman Powell has to say and try and read the tea leaves.
I am in that camp as well, however, I think most people will misread those tea leaves and assume that the Fed is closely monitoring inflation and employment gains and will act when they see more significant indications of inflation than we have now.
This is where I diverge from the masses. I think the Fed is stuck to data sets that are not real world and will miss an opportunity to strike before the iron gets hot. As you know by now, I believe inflation is a much bigger problem than the Fed and some economists believe it is. They follow certain established measurements and hold to what they see coming from that data. Inflation is now at what, a 5% year over year increase? Seriously?
Granted, my feelings on inflation are just that, feelings. I don’t have the data to back up what I am saying other than my grocery bill and my gas bill and my fuel oil bill. Things are much more expensive than they were last year or in 2019. It’s a fact.
Enough already you say and I will digress a little here. I have a theory about inflation and it may be a little convoluted but hear me out.
I think we are in an unusual inflationary period because these price rises really didn’t come from changes in commodity prices (although that is part of it) or huge increases in wages (although, that will carry the second leg of this inflationary spike), it came from disruption in supply chains and perceived shortages. It also came from something that may be hard to prove but if you think about it, probably has some truth to it. That is the key component of the inflationary period we are in.
Producers have had a very hard time raising prices over the last six to ten years. Inflation was at 1.7%-2.2% for a decade. There really was little room for manufacturers to increase prices without losing market share. Off brand and cheap imitation competitors held prices in check. Now, with the excuse of “shortages” and “supply chain issues” producers have taken advantage and raised prices on everything.
I will give you an example. I like Philadelphia Whipped Cream Cheese and for several years I have been paying $4.95-$5.50 for an 8 ounce package. On Sunday I went into the market looking for the cream cheese and I saw the price was $8.95. I asked the store manager why the increase? He said it was being increased from the wholesaler, who I am sure would say that the manufacturer has increased his wholesale cost. Somewhere in this chain, there is someone trying to use inflation as a tool to raise prices even more than normal. If you look into it a little deeper, where is the cost increase coming from? Philadelphia cream cheese is made famously with five ingrediants, none of which have taken off in price. As a matter of fact,Milk, which is the number one ingrediant is the same price it has been (roughly) for months. While gasoline costs have gone up, they have gone up multiple times before and there was no increase in the price of this product. So why the increase? Because they can get away with it under the guise of supply chain or inflationary costs.
I don’t normally ascribe to conspiracies. However, there seems to be something afoot here and while I don’t think producers have gotten together and said “Here’s our chance to take advantage of a bad situation”. I do think producers are taking advantage of the present times to raise prices without being held up as a villain.
The other part of my theory is this: Producers will keep these new prices with no thought of going back to pre-pandemic, pre-inflationary, pre-supply chain problems pricing. My example of the cream cheese is extreme and I don’t see that staying there for long because like almost everyone else, I am not paying for something that is literally 75% more expensive. However, there are many items that will stay at these inflated levels and manufacturers won’t have an excuse but when people get used to something at a certain price, they continue to buy it at that price.
Good Morning Peter, excellent article. I couldn't agree more, butttttt, that brings me to....when the fed does act, we need to hold on with both hands because they will be that far behind. Read you every day, but don't always comment. And by the way.....Coming to Tucson???