Friday, April 13, 2007
PPI And Public Policy
The annualized rate of cost increase for finished foods for the quarter ended in March was 18.7.
The annualized rate of cost increase for "finished" energy goods for the quarter ended in March was 9.4.
Contrast that to the annualized rate of cost increase for finished goods less food and energy, which was 2.3.
It should be obvious that for the lower 60% of income households, these numbers dictate either increased borrowing or decreased spending. For the lower 30%, this represents a dire hit. My adjustment on groceries is going up to 8.1% annually for the next quarter. Before it was at 7.8%.
The cost of elitish lala environmentalism is lethal for the lower echelon of American households and it is not doing much for the environment either. A workable energy policy would offset this trend, but instead of doing that we launched into subsidized ethanol programs, which will substantially increase the cost of the most basic foods for consumers.
Is this good public policy? Should the welfare of American farmers really be more of a concern to the American taxpayer than the welfare of the average consumer shopping for dinner? Darn it! It's very kind of the American taxpayer to pay us like this for our corn field, but have you spent your money well?
These are the effects of this exercise in feel-good environmentalism:
- Costs for intermediate (inputs to finished) foods and feeds increased on an annualized basis of 27.5 for the quarter ended in March.
- Costs for intermediate (inputs to finished) energy goods increased on an annualized basis of 19.7 for the quarter ended in March.
Watch for additional mergers, buyouts and acquisitions in grocery chains. For industries that actually make basic need items and sell them to consumers, these numbers foretell a rough year in which profits will be squeezed For industries that sell discretionary items to consumers, these numbers foretell a rough year in which total sales are likely to fall.
I would also recommend watching the NACM CMI (Credit Managers' Index). March was not good for either services or manufacturing. Combined dollar collections fell 7.8%, which is a record drop. Accounts turned over to collections have gone below 50, which signals a contraction (for this one component only). The services sector is much larger than manufacturing and had been expanding while manufacturing looked weaker. Now it is following manufacturing on a slow downward trajectory.
Both of the CMI indices are still in positive territory, but compare YoY:
Manufacturing March 2006: 56.1
Manufacturing March 2007: 54.6
Services March 2006: 60.1
Services March 2007: 55.4
Combined March 2006: 58.1
Combined March 2007: 55.0
The trajectory for Combined:
01 2007: 57.2
02 2007: 56.6
03 2007: 55.0
In general, a weaker dollar is favorable for manufacturing. However, when input costs rise sharply and when quite a bit of the inputs are imported, the effect is diminished or perhaps even entirely negated for import-dependent industries.
One thing that could help a lot, from several standpoints, is getting rid of the ridiculous $.55/gal import tariff on cane-based ethanol. Energy balance of sugarcane ethanol is much better than that of the corn-based stuff.
Thus we are being beat hard on import fuel costs, which is raising inflation. That's bad policy which hurts domestic mfrg. The ethanol only exists because of the subsidies, and like I say, it's a bizarre public policy. The price gap between foreign and domestic oil is quite high.
Jed, glad to read it!
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