Three Inflationary Case Studies: Coke, Pasta And Rent

Tyler Durden's picture

Following what appears to be just the beginning of a major market flush which could well bring the S&P to triple digits in order to serve as a catalyst for QE3, the word inflation has become taboo: after all, it is expected that Bernanke will have snapped his fingers, and the 15 minute count down to deflation will start. Alas, no. There are at least three products in which inflation has proven to be particularly stubborn, all due to a unique set of factors. The first one is Coke (the drink, although probably not isolated thereto), which just announced plans to hike prices 3 yo 4% due to still surging commodity costs. The second is pasta, whose prices are also set to soar, this time due to adverse climatic conditions. Per Bloomberg, "Unrelenting rainfall may have slashed U.S. planting of durum wheat to the lowest level in more than 50 years, fueling a surge in the price of pasta and noodles as mills scramble for supply of the grain." And the last, and possibly most perverse price spike, is the one which will actually hike the CPI, due to an increase in the shelter, or rents, component, as more and more Americans forgo owning a home in exchange for renting, in the process pushing up the one component that accounts for 41% of core CPI. In this way we see three completely unrelated channels in which inflation will continue to push through even as stocks plunge: an event which most MMT theorists always perceive as inherently deflationary.

First, on the Coke price hike:

Coca-Cola Co. (KO) plans to raise prices 3% to 4% on drinks beginning July 31 to combat rising commodity costs.

The price increase, reported by trade publication Beverage Digest and confirmed by a Coke spokesman Friday, will vary across different sizes and drink brands, and will result in prices being 5% to 6% higher than they were a year ago. The magnitude of the announce price increases is in line with Coke's announced pricing plans.

The report cited a letter from Coca-Cola Refreshments, Coke's company-owned bottling business in North America, to retailers.

Another independent Coke bottler, Coke Consolidated, plans to raise prices 3% to 5% in early July, according to the report, which also noted that most other Coke bottlers will likely raise prices by similar amounts.

Next, the reason to start warehousing pasta:

Unrelenting rainfall may have slashed U.S. planting of durum wheat to the lowest level in more than 50 years, fueling a surge in the price of pasta and noodles as mills scramble for supply of the grain.

Farmers who normally are finished planting by now had completed just 44 percent as of June 19 in North Dakota, which produces more than two-thirds of U.S. durum, government data show. It’s too late to sow more without delaying the harvest to the winter-frost period, said Frayne Olson, an agricultural economist at North Dakota State University in Fargo.

Planting may drop 47 percent this year to 1.365 million acres, the lowest since 1959, Olson said. In the past month, parts of North Dakota and Montana, the second-biggest grower, had triple the normal rainfall, National Weather Service data show. North Dakota durum prices are up 52 percent in the past month, and U.S. pasta in May was the most-expensive on record.

“Basically, the selling has shut off in the U.S., because if you’re a holder of durum, there’s no point in selling it,” said Jim Kulp, a general manager at Philadelphia Macaroni, which makes pasta including the Alphabet Soup noodles for Campbell Soup Co. “If you’re holding durum wheat, it’s like gold. So why would you sell it?”

Durum futures:

Grain elevators in North Dakota are paying farmers about $14.40 a bushel for durum on average, up from $9.50 a month ago, North Dakota State’s Olson said. The price may top the record of $23 reached in February 2008 if additional weather problems hurt crops this growing season, he said.

The price of durum is rising faster than wheat futures on the Chicago Board of Trade, which primarily track the soft-red winter variety grown in the Midwest. Wheat futures are up 41 percent in the past year to $6.6925 a bushel yesterday.

“Higher durum prices are going to work their way through the system to higher pasta prices,” Olson said. “The cost of durum in the total cost of manufacturing pasta is fairly significant. There’s a limited amount the pasta manufacturer can do to absorb that cost differential. This will eventually have to be passed on to consumers.”

And the third iteration of inflation comes in the form of product substitution, in this case one which will actually hike the very metric used to measure inflation. Greed and Fear's Chris Wood explains:

One technical problem for the Fed is that core CPI inflation is rising because the so-called “shelter” component, which measures rents, is rising. Thus, core CPI inflation rose from 0.6%YoY in October 2010 to 1.5%YoY in May. While the shelter CPI, which accounts for 41% of the core CPI basket, rose by 1.1%YoY in May, up sharply from a 0.7%YoY decline in August 2010 (see Figure 1). GREED & fear is not surprised to see shelter rising. For the one segment of the American housing market GREED & fear is long-term bullish on is rental housing. This is because Americans will now want to rent not buy, as they are fast learning to appreciate the flexibility that comes with not being trapped in negative equity. Remember that 22.7% of American mortgage holders are now in negative equity, with another 5% of borrowers having less than 5% equity, according to real-estate research firm CoreLogic. It is also the case that there are good deals for tenants in rentals because of the continuing excess supply of housing.

Ironically as the Obama administration has realized this urgency to move from home purchases to rents, his latest action will be one of further stimulus, this time one which will however blow the Core CPI inflation out of the water due to the heavy weighing of rents in the Core CPI basket. From Reuters:

The Obama administration is exploring ways to support rental housing as the troubled U.S. real estate sector has kept potential buyers on the sidelines, a top U.S. Treasury official said on Friday.

"We support a housing finance market that provides liquidity and capital to support affordable rental options and help alleviate the burdens that many low-income households face," Treasury Under Secretary Jeffrey Goldstein told a housing conference.

"We are also exploring how private channels can finance affordable multi-family housing, perhaps with limited, targeted governmental support," he said.

Goldstein said the administration's range of options to expand support for lending for multifamily rental properties include reforms such as risk-sharing with private institutions.

It would be very paradoxical if the Fed will soon be willing and able to commence QE3 due to "deflationary" concerns, better known as plunging stocks, only to see artificially stimulated Core CPI prohibit this overture courtesy of increasing Obama efforts to pander to voters as the presidential race picks up in earnest.

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Mercury's picture

Well, just make sure core CPI 2.0 doesn't include rent, coke or spaghetti.

Problem solved.   Isn't central planning fun?

dwdollar's picture

"As more Americans become homeless street people we find that rent is no longer a valid factor in determining inflation."

~ Ben Bernanke 2013

TruthInSunshine's picture

At the point when rents surge:

The FOMC, consistent with its duty to lie, obfuscate, distort, butcher & contaminate data and facts, has undertaken the decision to strongly urge the Bureau of Labor Statistics to remove the Owners' Equivalent of Rent portion of the CPI due to the still widely available supply of cardboard, which we have determined to be an adequate subsitute for human shelter.

--The Bernank

nope-1004's picture

The fact that a gov't, voted in on a mandate based on "hope" (what a joke!!), had to tap the SPR (a move done only twice before, I believe) means this gov't has lost all control over inflation and have no clue what to do next.

Gold and silver continue to be manipulated to cover up these crimes against ALL humanity.  Jail awaits.


cosmictrainwreck's picture

yup. this is how bad it is: even one of the hosts on CNN silly Morning Show today said: "a desperate move which just shows they don't know what they're doing" on CNN! Wonder if he got his fanny spanked.... Meanwhile, same show, Poppy is saying people-on-the-street going "WTF?"

Instant Karma's picture

I paid 89 cents for 2 liters of coke in 1987, and I can buy it on sale for $1 now. Essentially no price increase in 20 years. Pasta inflation? Give me a break. Rents? That is true, as is increased prices for used cars. Supply lower prices higher. Hence, buy a cheap house and a new car.

TruthInSunshine's picture

That's not very compelling, and even with respect to you claim about new cars, they're extremely pricey right now (although I agree used cars are a worse value proposition, thanks in no small part to the genius that was the 'cash for clunkers' program).

Medical insurance, prescription meds, tuition, quality meats (pork is out of control), vegetables, fruit, gasoline/diesel/heating oil, electricity (even regulated rates), property taxes, copper (out of control), building materials (low demand but reduced supply coupled with speculative bidding up of composite materials) -

- see a pattern here? Most of this list consists of things people have to buy. The iPad/computer/2 Liter/housing purchase offsets do not fiat for fiat offset these dramatic hikes because the computer, house, etc. are much more elastic, only needing to be purchased from every 5 to every 50 years.

Try going without medical insurance, utilities, food or gasoline for more than a few weeks.

And don't even get me started on beer. The price hikes in beer is enough to warrant a revolution.

Mr Lennon Hendrix's picture

Coca-Cola owns most of the fresh water aquifers in Third World States and if you want to drink fresh water there you will most likely buy a Coke product.  Coke is inelastic.

Wheat is interesting because there are substitutes for wheat, but still, it is an inelastic good.

As to computers not everyone needs one.  Same with ownership of most goods.

spooz's picture

Not so inelastic for me.  If coke is more expensive, I get Pepsi.  If Pepsi is too high, I get the store brand.  But then i don't drink the stuff.  I just supply it to my family and they take what they can get.

Popo's picture


And pasta inflation due to flooding is hardly the Bernank's pervue. There are three random data points taken here and they are not all related to money supply/liquidity so they don't paint a compelling picture.

BUT... Is there inflation in commodities? Yes.

Is it due to liquidity driven speculation? YES.

This silly article chooses to miss the far more compelling and obvious targets in factor of idiotic ones, and then fails to hit the mark. Why focus on discrete datapoints when you can look at an entire commodities index?
It's silly.

WaterWings's picture

I hate to say it, but you have a very good point(s).

John Williams, do you have an opinion?

Anyone paying attention will agree our way of life is totally ******, but I want to see $5/box for pasta at Walmart before I believe hyperinflation is here NOW.

We all know something big is on the way.

We've been at the tipping point for a while now. In my 30's I see a lot of my elders nodding their head at my comments - without alarm. Hmm.

Cognitive dissonance? Yes.

Is there a major default (WAR) coming? YES.

Fiat will always go the way of the Fiat.

tip e. canoe's picture

ww, i also find that the old timers are pretty much the only ones who i can have open conversations on such topics without having to mince words to sidestep the dissonance.

bugs_'s picture

I think this time around the worry won't be a shelf full of $5 pasta boxes - the worry this time is that there will be an empty shelf of $1 pasta boxes.

Ergo's picture

lol.  good one.

On rent in Houston:  My realtor friend tells me rental homes are the hottest he's ever seen in 20 years.  Part of the reason is job insecurity, so families are reluctant to buy.  Rental properties are only on the market a week in our area (middle of city).  Prices are going up. 

In the 'burbs, it's different.  People having mortgage trouble can't sell w/o a big loss, and thus are renting out their homes.  Move into a cheap apartment or move in with relatives, and rent out your house.  Better than foreclosure.  The ongoing cycle of job loss, divorce, etc., will kick you out of your home anyway.   

If you're a renter, consider this:  I like to write in an option clause to our lease agreements, for a one year extension at the same price and terms.  That's an absolutely free option, which protects against inflation. 

Oh regional Indian's picture

When in California in 2005-6, housing bubble roaring along, I tried to get a landlady to see that it would be good for both of us if we wrote a clause that said that unusual movement in prices/rents would need a sit down to decide how to reprice. I was of course looking at the crash straight ahead.

But she could not grasp the concept. I think it should be in every rental agreement.




ncdirtdigger's picture

Now that, is funny. Or is it?

mickeyman's picture

As more Americans become homeless street people we find that rent is no longer a valid factor in determining inflation."

~ Ben Bernanke 2013


And from a speech a few months later,

"As more Americans starve to death, the demand for food declines, which has a negative impact on inflation."

FEDbuster's picture

"To truly balance the rent component of the CPI, we have decided to include those paying zero rent in tent cities, Walmart parking lots and living in the basements or garages of relatives.  Therefore, 25% of the rent figure will be figured at zero cost.  This adjustment to the new reality will keep our CPI figures at or near zero through at least the 2012 election. 

We are also looking to adjust food costs to reflect the 45 million Americans receiving food stamps, thereby having a zero or near zero grocery bill.  Let's face it, between food stamps and food banks there are a bunch of people eating for free.

Medical costs are set to decline 20% due to a heavier weighting of the $4. generic prescription."

In other news, the government has just announced that from now on 2+2=5.

wisefool's picture

Sarc: Rent is like self determitalizationalism. I was in Chicago when oprah gave out free cars. Timmy G. was stuck doing tax forms for the IMF. That's the reason he was not able to fill out his own. But if you want a real mind bender:


US Tax Code pays for abortion. Keysianism was invented in Europe.


Any Euroes want to educated me on tax/abortion policy?

spooz's picture

No you are all educateded already.  Abortion and taxes (which is all you really need to know about Keysianismism).  Nuff said.

Soul Train's picture

We'll see how these markets are next three months re: prospects for QE3. The Fed has made public statements that the equity markets are a current transmission.

In the meantime, anyone thinking a quick bounce off of the 200 dma is in for a surprise.

Check out TRV and GE. They broke below the 200 dma this week and closed below.

Heads up! or should I say heads down.

Market is going lower and we should have a big day down, with plenty of head fakes both directions next couple months.

Buckle up and enjoy the ride. ;)

TruthInSunshine's picture

OT, but Hindenburg signal has truly arrived.

Paul Krugman wrote an article I fully agree with, wherein he makes the case that Iceland & Argentina are far better off since telling the wankin' fukin' bankers to piss off, and that Greece should follow their lead.

Batten down the hatches! Lock & Load, bitchez!

Argentina Is A PERFECT Example Of How A Default Can Work

krispkritter's picture

Well beat me with a stick and call me Puffy! Krugman? Had to laugh at this comment though: "Professor Krugman,

I have to say I love your blog and columns after following them for years.

I'm pretty middle of the road politically, but you are the only mainstream expert commentator on economic matters I know of that (a) has gotten it right almost all of the time over the years and (b) understands the horrible destruction that economic conditions can have on the lives of individuals, such as a high unemployment rate.

Anyway, I hope you continue to maintain a high profile. Perhaps policy makers will be swayed (more) someday."

Now that IS funny...

malek's picture

That is really funny!
Some people even compliment clowns in all seriousness...

wisefool's picture

Planned parenthood is an organization that recieves a part of 30% of the money that is the sum total of USD created every year.


Also, Ben has a PhD, but he consults a PhD when he does not know how many orders of magnitude to increase the money supply with/by.

wisefool's picture

You forgot to pay your taxes, idiot and I slipped through the abortion motivator hygiene school.

Do you want to know more?

doesmybuttlookfatinthis's picture

Its a tale of two economies. We will have inflation of things we need like food,energy and rent. And deflation in high end things we want like houses, big screen TVs and cars.

Beancounter's picture

Exactly right, add them to the excluded food and fuel costs and the only inflation you have left is in cars and airplanes so ...why worry.  Things are FINE.8

ghostfaceinvestah's picture

Commodity prices will soon crash, no worries there.  We are re-entering deflation, until Bernanke starts printing again.

Dre4dwolf's picture

We never got out of the deflation imo, I think food prices and junk where rising because people are getting scared and are starting to horde ;p....

Goldtoothchimp09's picture

sharing this with my ZH brethren -- stock market is ready to implode!  Based on my Elliott Wave setup.

WaterWings's picture

Watch the Fight Club porch scene.

Otherwise, keep up the good work. Merci.

TruthInSunshine's picture

Even Coca-Cola, with its war chest and legion of attorneys, is afraid to cross paths with Goldman Sachs, whose aluminum hording warehouse operations (sanctioned by both the LME & Eric PlaceHolder), are one of the main reasons for Coca-Cola's rising input costs:


Goldman, JP Morgan Have Now Become A Commodity Cartel ... - Zero Hedge


Coca-Cola and other consumers say that Metro in particular is allowing the minimum amount of aluminum allowed by the LME—1,500 metric tons a day—to leave its facilities, and that Metro could remove much more, erasing supply bottlenecks and lowering premiums for physical delivery in the process. Coca-Cola, which has complained to the LME, says it can take months to get the metal the company needs, even though warehouses are allowing aluminum to come in much more quickly. Warehouses, meantime, collect rent and other fees." It is not only Goldman's Metro operations, but includes JP Morgan's Henry Bath division, and naturally commodities behemoth Glencore, all of which are taking advantage of the LME's guidelines and rules which make the imposition of a pseudo-monopoly an easy task.

jo6pac's picture

I'm the left and thanks for pointing that out.


Everything is on schedule, please move along.

sun tzu's picture

Maybe Coca Cola should buy Alcoa. They can change their name to Alcola Cola.

TruthInSunshine's picture

Or maybe Eric PlaceHolder should get off his lazy, corrupt ass, and do his job, which in this case, would be building and prosecuting a case against these three collusionary warehouse bottleneckers.

I don't think I've seen a more useless DOJ than that which exists under Eric PlaceHolder.

topcallingtroll's picture

It would require another teddy roosevelt to break up these monopolies.

Obama has no clue. Even if he knew what was going on he has to remain silent because he is trying to use wall street to get campaign money.

TruthInSunshine's picture

Not that they weren't fallible and had no warts (they were and they did), but I like to believe that Eisenhower and Kennedy would not have stood for this shit, at all.

The truth of the matter is that the "let's really screw over consumers on the prices of essentials needed to live" racket began in earnest in 2000, when that piece of shit Phil Gramm, whose wife just so happened to be the chairwoman of the CFTC, sponsored The Commodity Futures Modernization Act of 2000 (CFMA), along with the Enron Loophole, which passed.

Before that time, absent acute and genuinely temporary crises (political events - OPEC Embargo, wars, extreme weather events - think coffee), prices on basic products and goods were quite stable.

It's been volatility city ever since 2000 across the board.

Bernankincide has massively exacerbated that masturbation.

wisefool's picture

Ahh yes. JFK was irish right? Always praying for the french gods to rescue them some day? The boys dying in Siam was not enough. needed the tribute too.


Under the administration of the French President Charles de Gaulle up to 1970, France reduced its dollar reserves, trading them for gold from the U.S. government, thereby reducing U.S. economic influence abroad. This, along with the fiscal strain of federal expenditures for the Vietnam War and persistent balance of payments deficits, led President Richard Nixon to end the direct convertibility of the dollar to gold on August 15th 1971, resulting in the system's breakdown (the "Nixon Shock").

Rick64's picture

 Not sure what your point is, but if your blaming Kennedy for the Vietnam war then you should check the timeline for that conflict.

TruthInSunshine's picture

Agree, Rick.

Call me crazy, but I got the distinct impression there was some very connected people that were quite angry with JFK for wanting to wind up operations in Vietnam.

Kennedy actually would have brought about a full withdrawal and conclusion, had he not been assassinated by a lone gunman who was then 'conveniently' killed by a topless nightclub owner with connections to the mafia who was all broken up emotionally over JFK's death.

Rick64's picture

 Johnson had reversed Kennedy's disengagement policy from Vietnam in withdrawing 1,000 troops by the end of 1963 (NSAM 263 on 11 Oct.),[136] with his own NSAM 273 (26 Nov.)[137] [138] to expand the war.

 Then the war really blossomed. Massive war profiteering and corruption, massive chemical weapons experimentation as well as drug experiments, and massive loss of life (61% of U.S. troops age 21 or younger).   Johnson lying his ass off to the American people (pentagon papers).

 Communism then now its terrorism. History does repeat.

wisefool's picture

My point is that if you try to glorify the Ike, Nixon kenedy era, and you do it objectively, you are going to see guys who thought gold was a barbaric relic, and redeemed it willingly to any foriegn nation with a USD. (most likely granted by the Marshal Plan)


At the sametime, all of them, including LBJ, participated in the "lofty" (non-barbaric) goal of preventing comunism from invading the colonies of the same fuckers who took our gold out of fort knox.