U.S. Consumers About to be Blindsided by Surprise Inflationary Shockwave

by toulour
Thu, 11/01/2018 - 09:35

While unsuspecting U.S. consumers are sitting around continuing to expect "low" 2% inflation, little do they know they are about to be blindsided by a coming inflationary shockwave, according to a new WSJ report. The report states that many U.S. consumer staple and industry-leading companies are either already in the process of raising prices, or have set definitive plans to do so in the very near future. This could mark the end to a long period of "low inflation" that the Fed has constantly leaned on as an excuse to keep rates low for nearly a decade.

For instance, Clorox is raising prices on everyday products like cat litter. Coca-Cola also reported higher prices for the past quarter. Mondelez International also plans to raise prices in North America next year according to an interview that its CEO gave on Monday. Mondelez said that it is passing along rising costs, including ingredient and transportation costs, to consumers.

Airlines are also passing on costs; they are paying about 40% more for jet fuel than they were a year ago. Delta, jetBlue and American have all raised fees, fares, or both. Trucking costs were up 7% annually in September and private sector wages and salaries in the September quarter rose 3.1%.

Arconic was able to widen its operating margins this past quarter on its aluminium products by using tariffs to justify price hikes. Manufacturers are paying about 8% more for aluminium and 38% more for steel than they were a year ago. Looming potential tariffs with China to the tune of $200 billion also continue to weigh on input costs. 

Apple also recently raised prices on its new MacBook Air and iPad Pro products by between 20% and 25%. 

(Source: WSJ)

Steve Madden, Ltd. said it would be raising prices on handbags and other products that it imports from China. It’s looking to shift production to other countries to avoid tariffs and said that products made in China could rise as much as 10% in price.

An interior designer working for Whiski Kitchen in Royal Oak, Mich was cited by the Journal as stating that she was paying 15% more for quartz countertops made in China as a result of U.S. tariffs. She's also paying about 10% more for imported cabinets. 

Sherwin-Williams and PPG, both in the paint manufacturing business, stated in recent weeks that they would continue to raise prices to cover rising costs for input materials like titanium dioxide. Sherwin-Williams raised prices by as much as 6% this month.

Sherwin-Williams Chief Executive John Morikis said last week that "Raw material inflation has been unrelenting and accelerating."

Food companies are also hiking prices. McDonalds' 2.4% SSS comps in Q3 were a result of higher burger prices. Chili's Restaurants raised the price of its two entree and an appetizer deal from $22 to $25 in the quarter. Habit Restaurants saw its prices rise by 3.9% in May of this year, even while traffic declined 3.4%. Hershey also has plans to sell candy in packaging next year that will raise its price per ounce. 

 “Retailers understand that when costs go up, something has to give,” said Michele Buck, chief executive of Hershey, last week. 

(Source: WSJ)

While inflation still technically remains near the Fed's 2% target, if you believe the CPI number <eye roll>, prices could move higher as a result of labor shortages, while headwinds for prices include the recent strength of the dollar, making imports cheaper.

It’s obvious that higher prices may work alongside of rate hikes to help dampen the United States economy further. Not only that, but higher prices could cause even more damage if the Fed sees raising rates as the main solution to inflation exceeding its expectations.

Diane Swonk, chief economist at Grant Thornton, told the Wall Street Journal: “We might see a pop of inflation in the first quarter.”

And if that happens, in a rising rate environment, what's Fed Chair Powell's next move going to be when prices call his bluff?

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