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Hyperinflation Concerns Top The Worry List For UBS Clients

Clients of UBS Group AG are wondering whether central banks’ massive stimulus could trigger hyperinflation, according to a list of their top economic concerns. Hyperinflation Concerns Top The Worry List For UBS Clients

In addition to what the pandemic means for consumer price pressures, the clients are also eager to know what international trade will look like down the road and how long it’ll take the transportation sector to recover. UBS obtained the feedback via its question bank, a database of market-related questions asked by professional investors.

Hyperinflation Concerns Top The Worry List For UBS Clients


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The concerns highlight the conundrum facing central banks as they continue to provide ultra-accommodative policy to help economies recover from the crisis. Commodity prices have spiked and other inputs are facing severe supply constraints, driving up inflation rates from Europe to the U.S.

Many policy makers consider the trend temporary. Still, the Paris-based OECD warned this week that rate setters need to set out clear strategies for coping with inflation risks.


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Updated: 9-24-2021

Costco To Raise Prices 3.5-4.5% While Also Reintroducing Buying Limits On Items Like Toilet Paper

Supply chain problems are pushing Costco to reintroduce purchase limits on key household items like bottled water and toilet paper, according to the company’s chief executive, who cited factors like port delays, driver shortages, and general “COVID disruption.”

Richard Galanti, Chief Financial Executive of Costco, told participants on an earnings call on Sept. 23 that the company was facing supply chain issues and inflationary pressures.

Factors pressuring supply chains and contributing to inflation, according to Galanti, include “port delays, container shortages, COVID disruptions, shortages on various components, raw materials, and ingredients; labor cost pressures, and trucker and driver shortages—truck and driver services.”

While Costco has responded to the supply chain crunch by ramping up purchases and ordering early with Christmas items like toys, the company is also bringing back buying limits on some products, Galanti said. These include toilet paper, bottled water, paper towels, and high-demand cleaning products, though he did not specify how many items customers would be able to purchase.

Seeking to ease some of the supply pressures, Galanti said Costco has chartered three ocean vessels and leased thousands of shipping containers for use on those ships for the next year to ramp up shipments between Asia and the United States.

On inflation, Galanti spoke of various factors pressuring prices.

“Inflationary factors abound, higher labor costs, higher freight cost, higher transportation demand, along with container shortages and port delays, increased demand in certain product categories,” he said.

Higher costs of plastics and resins have led to many items in Costco’s offering—such as trash bags, plastic cups, and pet products—to go up by between 5 to 11 percent, he said.

He estimated that the overall price inflation of products Costco is selling to be in the 3.5 percent to 4.5 percent range. This is an increase from the 1 percent to 1.5 percent range he estimated in March and the 2.5 percent to 3.5 percent range he projected in May.

Galanti said Costco would bear some of those costs, but some would be passed on to consumers.

“With inflation, to the extent that there are permanent inflationary items, like freight costs, or even somewhat permanent for the next year, we can’t hold on to all those, some of that has to be passed on and it is being passed on,” he said.

Galanti also touched on the semiconductor shortage that has bedeviled the automaking industry, among others. He said the chip crunch had also impacted items in Costco’s product offering, including computers, tablets, video games, and major appliances.

These 8 Items Are About To Get More Expensive

The pandemic has slowed down significantly (thank goodness), but its effects are still impacting the way you get your groceries. This is according to Richard Galanti, chief financial officer at Costco. This week, Galanti reported on Costco’s latest earnings, blaming lags in the supply chain for impending price increases on eight of the everyday groceries you buy. We have the list.

According to CNBC, Galanti said that Costco’s prices will soon rise because “inflationary factors abound.” He continued: “These include higher labor costs, higher freight costs, higher transportation demand, along with the container shortage and port delays … increased demand in various product categories some shortages, various shortages of everything from chips to oils and chemical supplies by facilities hit by the Gulf freeze and storms and, in some cases, higher commodity prices.”

In short, which common Costco items are about hit your wallet harder? Read through to find out which 8 Costco items members are stocking up on big-time right now.

1. Paper Products

This one has been generating big buzz on social media: Costco’s paper products have been affected by a pulp shortage. The Seattle-based chain has even made some changes to the size of some popular paper products.

2. Aluminum Foil

Some Costco members know their aluminum foil lasts ages. Unfortunately, Galanti said Costco has “been seeing accelerating prices across a range of products,” and aluminum foil was one of those he listed.

3. Meat

Galanti reported that Costco meat prices have gone up 20% in recent weeks.

4. Plastic Products

Costco has “cited price increases,” states CNBC, “for an assortment of plastic products”—reportedly up to 8%. This may be a good time to try more sustainable types.

5. Soda

Soda buyers at Costco may notice a hike in these products, as well.

6. Cheese

Costco is known for a great cheese selection, but this news could affect those burgers on the grill. Cheese was another product on Galanti’s list of Costco groceries that are about to get more expensive.

7. Rotisserie Chicken

There are lots of amazing facts about Costco’s rotisserie chicken, as many customers know. Galanti said the popular item—currently at just $4.99 for an easy dinner—could soon increase in cost.

8. Bottled Water

Just as you’re about to get thirsty this season, bottled water prices could balloon, Galanti said.

Updated: 10-3-2021

As Inflation Fears Grow, Investors Flock To TIPS

Here’s a look at what individual investors should know about Treasury inflation-protected securities

Fears of rising prices have ignited interest in Treasury inflation-protected securities as a way to hedge against inflation.

A popular approach to investing in TIPS has been through mutual funds and exchange-traded funds. This year through Aug. 31, about $47 billion poured into ETFs and open-ended bond funds with inflation protection as their themes, Morningstar Inc. reports.

That is up from $8.3 billion in net inflows during the same period in 2020. That has pushed total net assets in this class of funds and ETFs to more than $266 billion.

The largest fund in this sector is Vanguard Short-Term Inflation-Protected Securities ETF (VTIP). It has had net inflows of nearly $12 billion since Jan. 1, boosting its assets under management to about $54 billion.

U.S. economic data are flashing warning signs on what lies ahead. Federal Reserve Board Chairman Jerome Powell as well as many economists and investment strategists say they expect inflation to persist through 2022 due to a confluence of factors.

These Include: supply-chain and labor shortages; the rise in energy, food and housing prices; and a boom in consumer demand. In August, the consumer-price index, or CPI—a measure of personal consumption—was up 5.3% over the same period last year. That marked the highest level of inflation in 13 years.

“The inflows into the TIPS sector are coming from individual investors, financial advisers on behalf of clients, institutional investors, central banks and global pension schemes,” says Gemma Wright-Casparius, a principal and senior portfolio manager of fixed income at Vanguard.

The Intricacies

Because of their built-in protections against inflation, TIPS are recommended by some experts as fixtures in fixed-income portfolios. Todd Rosenbluth, head of ETF and mutual-fund research at CFRA, suggests they can even be a replacement for traditional Treasurys. The value of each bond’s principal is indexed to the CPI, and so increases at the same rate as inflation, though the interest rate payable stays the same.

Here is an example of how TIPS work. If you bought a security with a face value of $1,000 and the CPI rose 1% over the next six months, the value of the bond principal would rise $10. And because the interest payments are based on the principal, interest payments would also rise.

At maturation, in addition to interest payments already received, the holder receives either the face value of the bond or the adjusted value of the principal, whichever is greater. TIPS come in five-, 10- and 30-year maturities. Like traditional Treasurys, they are backed by the U.S. government and make semiannual interest payments.

But TIPS do come with risks. Ellis Phifer, managing director of fixed-income research for Raymond James, says TIPS typically underperform Treasurys, “especially in times of deflation.” Though deflation is rare, if it does happen, as prices fall, the value of the principal also will fall as it moves in line with the index.

So, investors risk lower interest payments, and principal loss if they have to sell before maturity; principal loss at maturity is also a risk for investors who bought the security at a premium.

Another risk TIPS holders face is, during periods of inflation, interest rates on traditional Treasurys and other bonds can offer higher yields than what TIPS and their fixed coupons offer.

With the buying and selling of traditional Treasurys, says Brian Therien, senior fixed-income analyst at Edward Jones, “Inflation expectations are built into their prices.”

When evaluating whether to buy TIPS or traditional U.S. Treasurys, Mr. Therien suggests investors look at a key benchmark: the break-even inflation rate published by the St. Louis Federal Reserve Bank. This rate reflects a market-based measure of expected inflation.

For example, the break-even inflation rate for 10-year Treasurys on Sept. 27 was 2.40%. If an investor feels inflation will be higher than 2.40% over the next 10 years, then the 10-year TIPS would be considered a better buy than the standard 10-year U.S. Treasury.

“Also keep in mind that you must pay income taxes on any increases to par value on these investments until your TIPS mature,” Mr. Therien says. “You can manage this by keeping them in tax-advantaged retirement accounts.”

Fund Dynamics

Funds and ETFs that hold TIPS tend to focus on different durations. Some, such as Schwab U.S. TIPS ETF (SCHP), are passive funds with largely short- and medium-term horizons geared to investors betting that inflation will climb.

The $20 billion fund tracks the Bloomberg Barclays U.S. Treasury Inflation-Linked Bond Index (Series L), and its TIPS all have at least one year remaining to maturity and are rated investment grade.

Its 12-month yield ended Aug. 31, 2021, is 3.01%. For investors with a long-term view on inflation, there are funds such as the $835 million Pimco 15+ Year U.S. TIPS ETF (LTPZ), which tracks an index of TIPS with maturities of at least 15 years. Its 12-month yield ended Aug. 31, 2021, is 3.08%.

Investors should look at each fund’s expense ratio to determine the returns after management fees. Also, Ms. Wright-Casparius says, look at the contents of the fund’s portfolio so you can assess the investment risk.

In addition to inflation-protected securities, she says, “Some funds hold mortgage-backed securities, global inflation-linked bonds, commodities and wide mandates that vary over time.”

Morningstar data indicates the top three inflation-protected bond funds offered to individual investors in terms of year-to-date total returns through Aug. 31, 2021. All have more than 50% of their portfolio invested in TIPS. They are:

Eaton Vance Short Duration Inflation-Protected Income Fund (EARRX) This $360 million open-end fund invests at least 80% of its assets in TIPS with a maturity up to 3.5 years. YTD return: 5.82%. Expense ratio: 0.90%. 12-month dividend yield: 2.75%.

Wells Fargo Real Return Fund (IPBJX) The $60 million open-end fund invests 80% in debt securities, 65% of which are TIPS, 20% in equities. YTD return: 5.46%. Expense ratio: 0.40%. 12-month dividend yield: 3.68%.

American Century Short Duration Inflation (APOGX) At least 80% of the open-end fund’s $2.8 billion in assets are invested in TIPS. It may invest 20% of its assets in securities dominated in foreign currencies. YTD return: 5.35%. Expense ratio: 0.01%. 12-month dividend yield: 1.37%.

These are the top three inflation-protected ETFs that have had the highest returns YTD through Sept. 24, according to an analysis by CFRA.

FlexShares iBoxx 3 Year Target Duration TIPS Index Fund (TDTT) This $1.4 billion fund invests 80% in securities that are in the iBoxx 3-year Target Duration TIPS Index. YTD return: 4.17%. Expense ratio: 0.18%. 12-month dividend yield: 3.21%.

iShares 0-5 Year TIPS Bond ETF (STIP) The $6.7 billion fund invests in TIPS that have a maturity of less than five years. It generally invests 90% of its assets in the Bloomberg Barclays U.S. Treasury TIPS 0-5 Index. YTD return: 4.15%. Expense ratio: 0.05%. 12-month dividend yield: 3.19%.

Pimco 1-5 Year U.S. TIPS Index ETF (STPZ) The $1.1 billion fund seeks to provide a total return of the ICE BoA 1-5 year US Inflation-Linked Treasury Index that tracks TIPS with maturities ranging from one to five years. YTD return: 4.14%. Expense ratio: 0.20%. 12-month dividend yield: 2.9%.

It’s Not The 1970S Again, At Least In Markets

With companies and households swimming in cash, overheating is a bigger danger than stagflation.

Lead Us Not Into Stagflation

What are we afraid of? The implication of the last few weeks, with the rally in the dollar as investors looked for shelter, is that there is reason to worry about both stagnation and inflation — the dreaded “stagflation.”

There are parts of the world that are trying to stage 1970s comeback tours; think of the U.K., where headlines about an “autumn” or “winter of discontent” have been resuscitated, borrowing the label from the notorious wave of strikes in early 1979.

This doesn’t necessarily mean that people buying the dollar expect anything on the scale of the 1970s. But even if these fears are rational, is a combination of stagnation and inflation really likely?

That was the subject of my latest Risks and Returns conversation with Lisa Abramowicz, which you can see here. There are plenty of ways to approach this debate, but one of the best arguments against stagflation comes from looking at the cash currently held by companies and by households.

They suggest that if there is a danger ahead, it is of economic overheating. That might well bring stock market disappointment with it, and could be very dangerous. It’s not stagflation.

On companies, the first point to make is that the pandemic has been fantastic for their margins. They cut back costs in 2020, and made out like bandits this year.

For the S&P 500, operating margins are the best since Bloomberg’s data begin in the 1990s; the numbers for the rest of the developed world and for the emerging markets are the best since the eve of the global financial crisis in 2007

If we take return on equity, a broader measure of profitability and the metric that corporate executives are supposed to worry about most, again we find non-financial companies in the U.S. back at the top of their range and close to an all-time high.

This isn’t just some quirk of the technology sector and its extraordinary ability to make money, although tech certainly has a lot to do with it.

Energy is the only industry significantly below its average return for the last 46 years. Several sectors, not just tech, are enjoying ROEs far in excess of all historical norm.

What happens when companies make lots of money? They become far more likely to spend lots of money.

After profit growth on the scale we’ve just seen, it’s reasonable to expect increases in capital expenditures. And if companies do actually start spending some money, that makes stagnation that much less likely.

There are other ways they could use the money, of course, such as much-criticized share buybacks, or paying dividends. But the opportunity is there for some investment, in the U.S. and also in the euro zone.

Companies aren’t the only ones with money on their hands. This is Longview’s chart of the sums held in U.S. household bank deposits, along with its estimate of how far this exceeds what should be expected.

You don’t need to believe in an ecstatic post-pandemic spending boom (which does indeed appear a little less likely after the last few months) to see this as some kind of a bulwark against stagnation.

And for the time being, families aren’t experiencing any particular difficulty paying their debts (in aggregate — there are many tragic exceptions), because of interest rates that remain historically low.

This is nothing like 2008. And with the housing market taking off, there is every possibility that consumers will make an attempt to move the economy in a 2008-like direction and bid up real estate prices.

All of this suggests that the “stag” part of stagflation is unlikely. With bonds still seeming uninvestable at current levels, it also implies strong arguments for a continuation of the bull market in stocks. That can be taken too far, because these conditions point to a risk of overheating.

Mike Wilson of Morgan Stanley charts mentions of “cost pressure” in earnings calls, and suggests this could signal that pressure on margins lies ahead.

There are also plenty of companies that believe they have pricing power (not unreasonably given their fat margins at present), and they widely intend to try to pass costs on to consumers, as Wilson shows with this chart taken from the National Federation of Independent Business survey of small companies.

This implies two risks. One is that inflation will get out of control. The other is that companies are overplaying their hands, and face the risk of tightening margins again as consumers balk at higher prices. Over time, margins tend to be mean-reverting. And most importantly, in this equation, there is the issue of paying employees.

Pressure for better pay has increased post-pandemic. Maybe this will prove transitory; the problem is that at present, far too much money is riding on the proposition that it will.

In the following chart from Wilson of Morgan Stanley, ECI stands for employment cost index — the chart follows the spread in the rise of nominal GDP over the rise in employment costs, a macro measure of the shares of profits that go to labor and capital. He suggests, powerfully, that current expectations of continued rises in margins from an historically high level are likely to be dashed.

There are plenty of dangers, then, in the money that companies have stored. Profitability on this scale doesn’t look sustainable. But such profits do make an economic slowdown much less likely. Overheating, not stagflation, looks the more pressing concern.

How Scary Do You Want Your Inflation Numbers?

Friday brought publication of the latest personal consumption expenditure, or PCE, inflation data for the U.S. Compiled as part of the accounting for gross domestic product, this is the Federal Reserve’s favored measure of inflation, so it matters.

The PCE deflator differs from consumer price inflation in that it is based on what people buy, rather than on the prices at which companies sell. As consumers will try to adapt to avoid paying excessive prices for goods that have just seen inflation, this means that it also tends to be lower than CPI.

The PCE data take longer to produce and so come with a greater lag. Last week’s numbers were for August, not September.

On the face of it, the numbers were pretty terrifying. This is what has happened to the headline PCE deflator over the last 30 years. On an annual basis, the increase is the highest in 30 years. Even on a monthly basis, the August rise was on a scale only seen in a couple of months since the blip caused by the 9/11 terrorist attacks 20 years ago.

I’d like to make one other point, on base effects. The argument that inflation was “transitory” rested at one time on the (reasonable) argument that it dropped dramatically during the pandemic shutdown, and 12-month figures were bound to look bad a year later. The problem is that these base effects have now almost passed from the equation.

The simplest way to deal with this, advocated by many who argued that people concerned by inflationary pressure (like me) were “fearmongering,” is to look at two-year rather than one-year inflation.

Even accounting for base effects, the PCE suggests that inflation is currently running as hot as it has done since 1994 (which happened to be a year when bond yields rose after the Fed felt the need to tighten).

As you can see from the very high level this measure hit in the early 1990s, it’s very premature to suggest that this is anything like a return to 1970s-style inflation. It remains perfectly possible that this will prove ultimately to be a transitory phenomenon.

But it’s more than a brief reaction to base effects. The fact that different people of goodwill can make the same data look more or less scary shows that the situation is still ambiguous. But if anyone thinks the latest PCE data showed that we needn’t be worried by a potential return to inflation, I think they’re wrong.

Survival Tips

I’m afraid I’m going to regale you yet again with an encouragement to read, or at least flip through, Winning the Losers’ Game by Charles D. “Charley” Ellis. We’ll be discussing it in a live blog on the terminal on Tuesday morning, at 11 a.m. New York time.

If you have access to the terminal, go to TLIV <GO> and you can follow the conversation in real time. We’ll post the transcript on the web by the end of Tuesday.

If you have questions for Charley, please send them to the book club email (NOT the best address to reach me about anything else) which is:

We’ve had a lot of interesting questions already, for which thanks. With any luck this debate will get us to the heart of the dilemmas of indexation, and the problem of asset allocation when everything looks too expensive. I hope it’s worth some of your time.

Updated: 10-4-2021

Broader Inflation Pressures Begin To Show

Price indexes that exclude extreme changes point to inflation running ahead of Fed’s 2% target.

While many pandemic-driven price pressures are easing, broader sources of higher inflation are replacing them.

That is the message from a slew of alternative inflation measures that strip away price changes due to idiosyncratic swings in supply and demand, and home in on longer-lasting pressures.

These alternative indexes are signaling “inflation is not as extreme as what the headline or traditional core shows right now, but it is picking up,” said Sarah House, director and senior economist at Wells Fargo.

“All of these measures have moved from signaling price stability to signaling sharp accelerations in underlying inflation,” said Brent Meyer, an economist at the Federal Reserve Bank of Atlanta.

Some economists interpret this as inflation returning to levels consistent with a healthy economy, after being too low before the pandemic. “To now see price pressures picking up, but not at extremely worrying levels—it’s progress,” said Blerina Uruci, senior U.S. economist at Barclays.

Inflation as measured by the Labor Department’s consumer-price index was 5.3% in the 12 months through August, close to the highest in 12 years. Economists generally expect that to fall, but disagree on how much.

They attribute much of the recent surge in prices to temporary causes—such as a post-vaccine spending upsurge, specific supply-chain problems and other production bottlenecks—that should fade as businesses ramp up output.

But a key question is whether prices will continue to rise more persistently once these temporary disruptions end.

The Federal Reserve has argued that inflation will recede to just above its 2% target by 2022. Nonetheless, Fed Chairman Jerome Powell, asked last week whether inflation is now broader and more structural than earlier this year, responded, “Yes, I think it’s fair to say that it is.”

There were signs in August that cost increases related to supply disruptions had begun easing. The core consumer-price index, which excludes the often volatile categories of food and energy, rose just 0.1% from July, the smallest monthly increase since February. Prices for used vehicles dropped sharply, as did hotel rates and airline fares, possibly due to the impact of the Delta variant on travel.

Alternative inflation measures can help suggest where inflation is headed, by cutting out statistical noise or zeroing in on historical pricing patterns, said Alex Lin, U.S. economist at BofA Global Research.

For example, some remove extreme price swings like June’s surge in used-vehicle prices, which accounted for more than one-third of that month’s CPI increase.

The Cleveland Fed’s 16% trimmed-mean CPI—which lops off the most extreme price changes—and its median CPI, capturing the middle-most price change, both grew at the same month-over-month rate in August as in July, suggesting that falling prices for airline fares, hotels and rental cars caused the overall CPI to overstate the slowdown in inflation.

The inflation shown by these indexes is lower than the trend in the CPI and core CPI, but still well above 2%, and—unlike those mainstream measures—continued to climb in August. The trimmed-mean CPI rose 3.2% in August compared with the same month a year earlier, up from 3% in July and well above the 2% average between 2012 and 2019.

The rising trimmed mean alongside a more sluggish pickup in the median CPI signals that while many prices are experiencing above-average inflation, most are not, said Robert W. Rich, director at the Cleveland Fed’s Center for Inflation Research.

The median suggests “inflation will move back down to a range consistent with the Fed’s long-term target, while the trimmed mean is suggesting there is more upside risk,” he said. The unprecedented nature of the pandemic shock makes interpreting these movements unusually hard, he cautioned.

An index from the San Francisco Fed that reslices CPI based on historical pricing patterns also signals that temporary price spikes caused by imbalances in supply and demand are fading.

This index regroups the Commerce Department’s core personal-consumption expenditure price index into a cyclical index, whose components are more sensitive to the strength of the economy because they go up when the labor market tightens, and into an acyclical series of all other prices.

During expansions of the last 25 years, acyclical inflation was usually lower than cyclical inflation, but it was faster from April to June. Now the two are about the same.

The Atlanta Fed’s sticky-price CPI is also signaling a pickup in underlying inflation. The index includes only items whose prices change relatively infrequently, meaning that they react slowly to changes in economic conditions—for example, medical care and rent.

“By tracking this measure, we think we’re getting something that’s telling us about…inflation a year or two or three out. And that measure is starting to move up,” said the Altanta Fed’s Mr. Meyer. The sticky-price CPI in August rose 2.6% from a year earlier, a slight acceleration from July, and nearing the 2.8% rate that prevailed just before the pandemic.

The significant increase in price pressure signaled by this and the other indexes is a potential worry, Mr. Meyer said.

OPEC Opts Against Big Output Boost, Pushing Oil Prices To Seven-Year High

Cartel and Russia-led group had previously said they would add about 400,000 barrels a day each month through next year.

OPEC and a Russia-led group of oil producers agreed to continue increasing production in measured steps, delegates said Monday, deciding against opening the taps more widely, and driving U.S. crude prices to their highest levels since 2014.

West Texas Intermediate, the main U.S. oil price, rose 2.3% to close at $77.62 a barrel. Brent, the international gauge, added 2.5% to end at $81.26, its highest settling price in three years. Climbing oil prices recently had analysts and economists expecting OPEC and its Russia-led allies to lift production more significantly.

Instead, the Organization of the Petroleum Exporting Countries and Russia said the group, which calls itself OPEC+, would lift its collective output by 400,000 barrels a day in monthly installments, part of a previously agreed plan to return output to pre-Covid-19 levels.

In the U.S., oil drilling and output have been ticking higher, though they are yet to return to pre-pandemic levels. The last time that domestic crude prices were so high, there were roughly 1,100 more rigs drilling for oil than the 428 at work last week, according to oil-field-services firm Baker Hughes Inc.

That was before the pandemic crushed demand for transportation fuels—and before OPEC and its market allies in late 2014 launched a price war against U.S. shale drillers by turning on the taps and flooding the market with cheap crude.

Average daily crude production in the U.S. has been 6.7% lower than a year earlier while commercial stockpiles of crude, excluding the government’s Strategic Petroleum Reserve, are 15% lower, according to the U.S. Energy Information Administration.

Oil’s recent gains are part of a broad rally in the price of commodities, from lumber and oats to propane and natural gas. The gains have been propelled by sharp increases in demand from reopening economies that have outpaced the ability of producers to increase output and efficiently deliver raw materials to market.

Rising prices are being passed on to consumers through increases in the cost of finished goods and have stoked fears that inflation could derail the economic recovery.

OPEC+ abandoned the price war early last year when the coronavirus shut down economies and drove down demand. As economies started to reopen, OPEC+ began returning that oil to the market. It more recently agreed to add about 400,000 barrels a day of crude each month, seeking to return production to pre-Covid-19 levels by next year.

Economies have started humming again after near-hibernation during some of the worst periods of the pandemic. Natural-gas prices, too, have soared on higher demand and low inventories in the U.S. and Europe. High coal and gas prices and government efforts to cut electricity use have led to power cuts in China.

The shortages have contributed to high oil prices, analysts say. Some of the world’s gas-fired power plants can switch to using oil. While it is too early to say whether any have done so in any great number, markets have been pricing in a lift in crude demand.

Saudi Arabian Oil Co. has forecast that a temporary shift from natural gas to oil in some power generation could add 500,000 barrels a day of oil demand.

OPEC and a Russia-led group of oil producers agreed to continue increasing production in measured steps, delegates said Monday, deciding against opening the taps more widely, and driving U.S. crude prices to their highest levels since 2014.

West Texas Intermediate, the main U.S. oil price, rose 2.3% to close at $77.62 a barrel. Brent, the international gauge, added 2.5% to end at $81.26, its highest settling price in three years. Climbing oil prices recently had analysts and economists expecting OPEC and its Russia-led allies to lift production more significantly.

Instead, the Organization of the Petroleum Exporting Countries and Russia said the group, which calls itself OPEC+, would lift its collective output by 400,000 barrels a day in monthly installments, part of a previously agreed plan to return output to pre-Covid-19 levels.

In the U.S., oil drilling and output have been ticking higher, though they are yet to return to pre-pandemic levels. The last time that domestic crude prices were so high, there were roughly 1,100 more rigs drilling for oil than the 428 at work last week, according to oil-field-services firm Baker Hughes Inc.

That was before the pandemic crushed demand for transportation fuels—and before OPEC and its market allies in late 2014 launched a price war against U.S. shale drillers by turning on the taps and flooding the market with cheap crude.

Average daily crude production in the U.S. has been 6.7% lower than a year earlier while commercial stockpiles of crude, excluding the government’s Strategic Petroleum Reserve, are 15% lower, according to the U.S. Energy Information Administration.

Oil’s recent gains are part of a broad rally in the price of commodities, from lumber and oats to propane and natural gas. The gains have been propelled by sharp increases in demand from reopening economies that have outpaced the ability of producers to increase output and efficiently deliver raw materials to market.

Rising prices are being passed on to consumers through increases in the cost of finished goods and have stoked fears that inflation could derail the economic recovery.

OPEC+ abandoned the price war early last year when the coronavirus shut down economies and drove down demand. As economies started to reopen, OPEC+ began returning that oil to the market. It more recently agreed to add about 400,000 barrels a day of crude each month, seeking to return production to pre-Covid-19 levels by next year.

Economies have started humming again after near-hibernation during some of the worst periods of the pandemic. Natural-gas prices, too, have soared on higher demand and low inventories in the U.S. and Europe. High coal and gas prices and government efforts to cut electricity use have led to power cuts in China.

The shortages have contributed to high oil prices, analysts say. Some of the world’s gas-fired power plants can switch to using oil. While it is too early to say whether any have done so in any great number, markets have been pricing in a lift in crude demand.

Saudi Arabian Oil Co. has forecast that a temporary shift from natural gas to oil in some power generation could add 500,000 barrels a day of oil demand.

Meanwhile, U.S. frackers, which normally boost output when prices rise, have been reining in their spending instead. The lack of a U.S. bump in supplies so far means “control of pricing is very much in the hands of OPEC+,” said Mike Muller, the head of Asia for commodities trading giant Vitol, during a Sunday webinar hosted by Dubai-based consulting firm Gulf Intelligence.

At a technical meeting last week to prepare for Monday’s gathering, OPEC economists told delegates that the group could face excess supply by the end of the year. A document prepared by the secretariat, seen by The Wall Street Journal, forecast that oil markets could be oversupplied as early as December.

Delegates said the meeting was a straightforward affair, compared with recent meetings of OPEC+ that have been more contentious. Earlier this year, the United Arab Emirates held up a decision for days, insisting it be allowed to pump more oil inside the group’s complex quota system.

Between meetings last year and earlier this year, delegates veered from optimism about the pace of recovery to pessimism over signs of slower growth. They became accustomed to watching Covid-19 case counts and vaccination rates, as well as global oil supply and demand data.

This time, delegates said, they coalesced around sticking with the group’s gradual plan to boost output. Saudi Arabia privately signaled to some delegates it is seeking higher prices now to make up for lost revenue last year, according to delegates.

Oil-export revenue in Saudi Arabia almost halved to $119 billion in 2020 compared with the previous year, according to OPEC’s statistical report issued last week.

The kingdom is also confident the global economy can cope with high prices amid the post-Covid recovery, and isn’t worried about U.S. shale producers taking advantage of higher prices. In the past, shale producers have quickly sprung into action, boosting output to take advantage of prices.

This time, Saudi Arabian officials believe, pressure from U.S. investors has kept many on the sidelines, according to delegates.

“The kingdom is comfortable with the current price range and feels it won’t weigh on demand for oil,” said a Saudi official.

Other OPEC members are simply unable to substantially boost output.

Angola, Algeria and Nigeria are pumping flat out and have struggled with underinvestment in their oil fields for years. They don’t have the cash to quickly add more capacity. Sanctions, meanwhile, have kept a lid on output from Iran and Venezuela.

Updated: 10-5-2021

PepsiCo Will Raise Prices To Offset Higher Costs, CFO Says

PepsiCo Inc. Chief Financial Officer Hugh Johnston said that higher prices will be the “No. 1” tool the beverage and snack maker will use to offset higher commodity, transportation and supply chain costs.

Speaking in an interview, Johnston said PepsiCo will also change the mix of products it sells in a bid to nudge shoppers toward more profitable items — like variety packs of Lay’s chips instead of larger bags.

“There’s an opportunity for us to get some margin there,” he said. The maker of Mountain Dew and Doritos has also improved its ability to leverage demographic data across regions, allowing it to use its shelf space more efficiently, he added.

“In local grocery stores, we can get more sales per square foot,” he said. These tools “allow us to drive higher pricing and higher profitability.”

PepsiCo on Tuesday reported third-quarter sales that beat analyst estimates while raising its full-year revenue forecast.

Johnston said that the company’s beverage business has been hampered by a shortage of certain supplies, such as aluminum cans used for soft drinks and plastic bottles for Gatorade sports drinks.

“We are not immune to it,” Johnston said. “It’s been a bit of a challenge.”

Cotton Prices Surge To Highest Level In A Decade

China buys up U.S. supplies of crop, even as Trump-era import ban limits use of Chinese-grown fiber

Cotton futures are trading at their highest price in about a decade, with growing Chinese demand being met in part by rising U.S. exports to China, a curiosity of Trump-era trade-war policies.

Most-active U.S. cotton futures trading on the Intercontinental Exchange closed Tuesday up 3.8% at $1.09 a pound, keeping prices at their highest level since September 2011. Prices have risen 22% over the past 11 sessions.

Higher clothing prices could eventually follow.

Prices for other raw materials, such as lumber, have surged this year, because of high demand and supply-chain kinks that have kept goods from getting to customers who want them.

Prices for other U.S. crops, such as corn and wheat, have jumped this year amid drought conditions in the U.S. and abroad. Cotton shows the sometimes-unexpected effects that trade policy can have on prices.

Last year, President Donald Trump banned U.S. imports of clothing and other products made of cotton from the Xinjiang region, China’s largest cotton-producing area. The administration said at the time that there was evidence that the products were made with forced labor by the Uyghur ethnic group.

U.S. companies still can import cotton products made in China if the cotton itself is from somewhere else. So China is importing cotton—much of it from the U. S.—to make goods and ship them back.

China’s appetite for cotton imports is, in part, being fulfilled by cotton produced in the U.S. According to the U.S. Department of Agriculture, the pace of U.S. export sales of cotton to China since the start of the new marketing year on Aug. 1 is 83% higher than this time last year.

“If you cannot use Xinjiang cotton, you have to import a lot more cotton and yarn,” said Peter Egli, the director of risk management for Plexus Cotton Ltd.

Mr. Egli added that China also was filling its cotton needs from other significant exporting countries, such as India.

In a policy address Monday, U.S. Trade Representative Katherine Tai said the U.S. planned to start a new round of trade talks with China while maintaining tariffs on Chinese imports.

According to the most recent outlook from the USDA, consumption of cotton in China in the current marketing year is expected to be 41 million bales, the equivalent of roughly 8.9 million metric tons. That is up 24% over the past two marketing years, driven in part by a post-pandemic surge in demand for consumer goods.

Fund traders have increased their bullish bets, according to the Commodity Futures Trading Commission, as U.S. farmers begin to harvest their crops. The USDA reports that the cotton harvest nationwide is 13% complete, and the crops being harvested are looking good—with 62% of them in good or excellent condition, versus 40% at this time last year.

“Conditions are good right now, so the harvest should stay good,” said Jack Scoville, an analyst with the Price Futures Group.

“China has become more active in the world market,” he said, adding that the U.S. can offer the volume and quality of cotton that China wants.

Yet, China’s robust demand for cotton and other raw materials could peter out. Power outages have swept through Chinese provinces, with the government sometimes forcing factories to shut down to save energy. The National Bureau of Statistics in Beijing reported Thursday that the country’s manufacturing activity contracted in September, ending an 18-month expansion streak.

“Power rationing will constrain industrial activity until demand weakens enough to bring the domestic electricity market back into equilibrium,” said Julian Evans-Pritchard, senior China economist with Capital Economics, in a note last week.

The Evidence Is Piling Up: Inflation Doesn’t Look Transient

Price pressures are increasing in the U.K. The Bank of England will need to tread carefully in managing expectations.

Bank of England Governor Andrew Bailey says that the cost factors that have driven U.K. inflation to its highest level in more than nine years will fade. Traders in the sterling markets are starting to disagree with his optimism.

After years when the inflation hawks turned out to be jumping at shadows, I’m starting to think they may finally be proved right.

Surging energy prices, supply chain disruptions and labor market shortages are conspiring to undermine Bailey’s argument made in a speech last week that “the price pressures will be transient.” That’s prompting increased bets that policy makers will have to react to faster inflation even though the nascent recovery in economic growth has stumbled.

The U.K. is far from alone in seeing price pressures piling up. Inflation in the U.S. and Europe is also leaping higher, and the supply-chain problems that have seen shipping costs soar are a worldwide phenomenon.

Traders around the world are beginning to question the central bank orthodoxy that says inflation will calm down next year. But there are domestic issues at play that leave Britain particularly vulnerable, with annual inflation currently running at 3.2% and the central bank forecasting it will climb above 4% before the year is out.

For one thing, Britain is suffering an acute labor shortage, exacerbated by its decision to leave the European Union and restrict the flow of overseas workers. Some 120,000 pigs face being slaughtered for pet food, for example, because of a dearth of meat-plant staff that’s left farms with too many piglets and not enough places to store them.

In the energy market, tightening gas supplies in global markets are amplified in Britain, which doesn’t have a large storage capacity and is dependent on fuel imports. U.K. natural gas futures exploded to a record this week, extending their price gains in the past 12 months to an astonishing 700%.

A shortage of truckers closed swathes of U.K. service stations as they ran out of fuel in recent weeks. The laws of supply and demand have duly kicked in; the price of gasoline has climbed by almost a fifth this year, leaving it just a few pennies short of all-time highs.

And a worldwide rise in the cost of foodstuffs — the United Nations’ global food price index has risen by 25% in the past 12 months — has ended a nine-month streak of declines in British food costs, with prices set to rise even higher in the coming months.

Greggs Plc, which sells sandwiches, baked goods and other snacks from more than 2,100 shops across the country, said earlier this week it’s expecting higher costs for ingredients toward the end of this year and into 2022.

A British Chambers of Commerce survey published earlier this week showed that 60% of U.K. manufacturers expect to hike prices in response to the deteriorating economic backdrop. “Acute supply shortages and rising raw material costs drove an historic surge in inflationary pressures in the third quarter,” according to Suren Thiru, head of economics at the BCC.

Concern that inflation will prove sticky is rippling across U.K. markets. The 10-year breakeven rate, which gauges expectations for future inflation by measuring the yield gap between inflation-protected gilts and vanilla government debt, has climbed above 4% to its highest level in 13 years.

In sterling interest-rate futures, yields have soared in the past month as traders anticipate that the Bank of England will have to raise rates earlier than previously expected.

Bloomberg Economics calculates that the market is now pricing in an 80% chance of the central bank raising its official rate to 0.25% from 0.1% by the end of the year.

That likelihood is up from about 10% at the start of last month — an astonishingly fast turnaround in expectations that reflects growing speculation among traders and investors that inflation is indeed here to stay.

Managing those expectations, both about where prices will settle and what action policy makers will be forced to take, will make for a difficult balancing act for the Bank of England in the coming months. It can’t afford any missteps.

Updated: 10-7-2021

Conagra, PepsiCo And Other Food Makers Grapple With Higher Costs

Supply-chain problems and labor challenges become ‘a daily grind,’ pressuring profits and pushing up grocery prices.

Major food companies are boosting prices as they contend with escalating costs, and labor and transportation problems that are hampering the flow of staples to grocery-store shelves.

Makers of goods from french fries to meat snacks are working to secure trucks and staff processing lines, executives said, as costs for products as diverse as packaging and cooking oil rise.

Companies including Conagra Brands Inc., PepsiCo Inc. and Lamb Weston Holdings Inc. are raising prices to keep up, they said, while striving to keep products in stores.

Supply-chain problems are growing for U.S. food makers at a time consumers are spending heavily on food, in supermarkets and restaurants. Consumer spending at grocery stores was 4% higher in August than in the same month a year earlier, according to U.S. Census Bureau data.

Restaurant sales have climbed this year as Covid-19 restrictions ease, though concerns over the Delta variant have eroded some of the rebound in recent weeks.

Conagra, which produces Slim Jim meat sticks, Pam cooking spray and Hunt’s ketchup, on Thursday raised its inflation projection for the year, while reporting that its quarterly profit fell 29% to $235.4 million.

Executives said the Chicago-based company in recent months has faced higher costs for meat, grains and steel cans, as well as labor and transportation challenges.

The company’s overall sales fell 1% to $2.65 billion from $2.68 billion for the quarter ended Aug. 29, a better result than the expectations of analysts polled by FactSet.

Conagra Chief Executive Sean Connolly said the company is trying to respond to stronger-than-expected demand as consumers continue working remotely, watching movies from home, and cooking their own meals more than they did before the pandemic.

“This is a great problem to have, but it increases the demands on our supply chain,” Mr. Connolly said. “It’s a daily grind.”

Lamb Weston, the top North American seller of frozen potato products, separately said Thursday that its quarterly profit fell by two-thirds to $30 million for the quarter ended Aug. 29, pressured by what the Idaho-based company called rapidly increasing transport costs, scarce labor and other disruptions, including intense summer heat that damaged potato crops in the U.S. Pacific Northwest.

The company said it will increase prices to offset rising costs, and alter production and staffing schedules to help attract and retain more workers.

“Everything we’re doing, it’s going to take time,” said Tom Werner, Lamb Weston’s CEO. For now, Mr. Werner said, labor challenges are disrupting production and making the company’s processing plants less efficient.

Food prices are climbing around the world, as growing consumer demand runs up against dry farm fields in North and South America that have constrained harvests, along with transport disruptions driven by the Covid-19 pandemic and damaging storms.

The United Nations’ Food and Agriculture Organization said this week that its food price index, measuring costs of meat, grains, sugar and other commodities, climbed in September to the highest level in 10 years.

Supply-chain problems are challenging other top U.S. food makers. PepsiCo said earlier this week that it faces higher costs for aluminum cans, plastic bottles, labor and trucking, though the company boosted its profit expectations for the year because of rising sales of Mountain Dew, Doritos and other snacks.

Gatorade drinkers in Pennsylvania, New York, Massachusetts and elsewhere report finding the sports drink scarce on store shelves. PepsiCo officials this week said they had been scrambling amid a shortage of plastic bottles for the company’s Gatorade drinks. A spokesman declined to say how much of its production was affected.

General Mills Inc. said last month that the Cheerios and Betty Crocker parent is dealing with hundreds of operational disruptions—such as more-expensive ingredients and a shortage of truck drivers—that are pushing up costs for supermarket customers.

To keep pace with demand, Mr. Connolly said Conagra is aggressively recruiting workers and trying to ensure they stay healthy.

The company also is striving to maintain the best relations possible with its employees, he said, during a time when workers at other big food companies such as Mondelez International Inc. and Kellogg Co. have gone on strike during contract negotiations to protest what they see as unfair demands by employers.

Conagra is also maintaining pressure on material and ingredient suppliers and establishing contingency plans to deal with shortages, such as potentially swapping in different ingredients or finding secondary suppliers, Mr. Connolly said.

“We’re looking for alternate solutions even if they come at a higher cost,” Mr. Connolly said in an interview.

Strong demand and supply challenges mean Conagra hasn’t been able to deliver on customer orders as fully as the company would like, executives said, though they added that they are able to fill nearly all orders.

The company has said that demand for its Hunt’s products has been unprecedented, and that availability of some items would be low until it can process more tomatoes from this year’s harvest.

Conagra said Thursday it expects gross inflation—which doesn’t take into account hedging—to be about 11% for fiscal 2022, versus its earlier estimate of 9%. The company plans to continue adjusting prices and cutting costs, and said its prices likely will rise 4% or more during the current fiscal year.

Executives said they expect ongoing strong demand, price increases and cost-cutting measures to offset the higher costs. So far shoppers are largely sticking with Conagra’s brands despite higher costs, they said, though the bulk of the company’s price increases have only recently begun to show up on U.S. supermarket shelves.

Mr. Connolly said Conagra also might reduce promotions on some items to keep demand in check and avoid exacerbating supply challenges. “We don’t need to fan the flames,” he said.

Updated: 10-8-2021

Inflation Expectations Matter For Federal Reserve’s Clout

Faster price growth can become a self-fulfilling spiral and undermine the central bank’s credibility.

After decades of rarely cracking 2%, inflation was up 5.3% year-over-year in August. This was unthinkable a few years ago, and it may get worse before it gets better. Ports, rails and trucks are backed up, and supply-chain shortages abound. Energy prices are creeping up, and it is not even winter yet.

Federal Reserve officials are trying to reassure the public that this is temporary, the natural result of taking an economy offline and restarting it, or that inflation is limited to a few quirky sectors like used cars. But at what stage does transitory inflation become permanent, and when do we need to worry? The answers are “not yet” and, more important, “now.”

All inflation pretty much starts as temporary. It could be due to a spike in oil prices, supply shortages that cause the prices of food and other goods to rise, or the injection of a lot of money into the economy by the Fed.

But whether inflation peters out when conditions change depends on people’s expectations. If stores raise their prices because they expect shortages to last for a several months or a year and people demand higher wages to pay for the increase, inflation takes hold and is hard to extinguish.

The role of expectations has received some pushback lately from senior Fed economist Jeremy Rudd. Expectations may not be a great predictor of sudden inflation, like the type we are seeing now. Economists also do not fully understand what drives expectations, and they are very difficult to observe. But there is good evidence that over the long term, expectations matter.

Expectations don’t just depend on how long shortages last; they are also influenced by policy. That is what went wrong in the 1970s. Prices of food and oil went up, and that was met with accommodative monetary policy. People expected inflation, and it became self-fulfilling. That’s in large part because the Fed also lacked credibility.

The central bank was in a new, untested regime after the U.S. left the Bretton Woods system in 1971, and Fed Chair Arthur Burns was skeptical he could do much about prices. Inflation spiked from 1972 to 1974 and then rose again in 1976, rising to more than 13% by 1980. Finally, the Paul Volcker-led Fed increased rates enough to break inflation once and for all, but that led to a recession.

There are parallels today. The Fed in the 1970s also tried to reassure people that inflation would pass, as the central bank is doing now. And, despite a resurgence in inflation, the modern Fed is pursuing extremely accommodative policies, keeping interest rates near zero through 2022 and buying $120 billion worth of assets each month.

The Fed is also promising to tolerate more inflation, even if it goes above target, though how much it will tolerate and for how long is unclear. The Fed may not have the credibility it once did. If Americans follow monetary history, they would expect higher inflation to take hold.

But some things are different, which may temper inflation expectations and help avoid a repeat of the 1970s.

It is a more global economy; the U.S. now imports about 15% of its goods and services (nearly double the percentage in the early 70s) from other countries, many with cheaper labor, which means if global supply-chain issues are resolved, prices may fall, too. We also buy more goods online, which means prices are observable across many different sellers.

This has become a deflationary force because pricing is more competitive and merchants (and buyers) know what others are charging and prices become more dynamic. Rudd argues labor is also less centralized. Unions traditionally negotiated cost-of-living increases in salaries. Only 6% of U.S. workers are unionized today, and wages are rarely pegged to inflation.

Inflation expectations may also be what economists call “well-anchored,” meaning people still don’t expect high inflation to stick around, even if they see some now. That could be because generations of Americans have never seen high inflation, and it can be hard to imagine risks you have never experienced.

A survey from the New York Fed shows that a big generational divide has emerged over inflation expectations: Americans younger than 40 expect 3% inflation in the next three years; those older than 59 expect 4.9%.

The combination of better price information online and inflation naivete may keep expectations inflation from spiraling out of control.

But that doesn’t mean there won’t be costs and risks along the way. Wages are up; once companies pay people more, they can’t cut their wages, and high labor costs mean higher prices on all goods. Regular blips in the price of energy may also feature in the economy as the nation cuts production without reliable alternatives.

That may lead to regular bouts of inflation. And in some ways the uncertainty can be just as economically damaging as regular high inflation because it alters expectations, too.

There is a good chance inflation will bounce around 3% or 4% in the coming years. This is not as catastrophic as the 1970s, but it is much larger than what people are used to, and it undermines any perception the Fed can manage its 2% target; increasing the target to match higher inflation won’t enhance its credibility.

Without credibility, effective monetary policy is much harder because the Fed can’t influence expectations. And if it can’t do that, it can’t control inflation, either.

WTI Crude Hits $80 A Barrel For First Time Since 2014

West Texas Intermediate crude futures hit $80 a barrel for the first time since November 2014 as a global energy crisis boosts demand and OPEC+ keeps supplies tight.

The benchmark’s surge above the key level comes after the U.S. Energy Department said that it had no plans “at this time” to tap the nation’s oil reserves, cooling fears that the rally would be tempered with emergency supply.

That comments came after Saudi Arabia and its partners opted to only modestly increase output in November. Many analysts had expected OPEC+ to deliver a bigger hike as the surge in natural gas prices looks set to cause a spike in oil demand this winter.

West Texas Intermediate crude for November delivery advanced $1.75 to $80.05 a barrel at 10:09 a.m. in New York.

Updated: 10-7-2021

Richest Americans Flee Treasuries With Holdings At 17-Year Low

America’s super-rich hold fewer U.S. government and municipal securities than they’ve done for almost two decades, according to recent data from the Federal Reserve.

The top 1% of households by income held $887 billion of those assets as of June, the smallest amount in 17 years and down from a peak of $1.5 trillion a decade ago.

Americans lower down the income ladder have been trimming their holdings too. Public and municipal debt held by the bottom 99% of households peaked at about $3 trillion in June 2019, and is down by almost $400 billion since then.

High-earners traditionally tended to buy municipal bonds to take advantage of tax exemptions on the interest income.

But with rates on Treasuries and munis near historic lows, it’s likely that they “searched for higher yields elsewhere, whether via equities, high-yield or investment-grade debt, private credit, non-fungible tokens, crypto, etc.,” said Peter Boockvar, chief investment officer for Bleakley Advisory Group.

Benchmark 10-year Treasuries are currently trading around 1.55%. That’s up from the all-time trough they hit last year, but still just a fraction of the long-run average. Meanwhile, inflation has been above 5% for months.

“Higher-income households are likely well aware that they are receiving negative real returns on U.S. government and municipal securities,” said Chris Ahrens, a strategist at Stifel Nicolaus & Co.

The top 20% of households held 74.2% of U.S. government and municipal securities, the lowest share in records dating back to 1989, according to the Fed.

Levi’s Won’t Be Unraveled by Cotton Price Surge

Apparel company’s comments on the issue seem to have quelled investors’ near-term fears.

Expensive cotton is in vogue again and apparel company investors aren’t too happy about it.

Cotton prices have surged 18% over the past month, and 42.5% year to date, to levels last seen roughly a decade ago. That has sent shares of apparel companies—including denim-maker Levi Strauss —tumbling.

On Wednesday alone, Levi’s shares were down 5.1% while the S&P 500 index was up 0.4%. Fast-fashion retailers H&M and Inditex were down 4.9% and 4.6%, respectively, while Gap shares fell 2.2%.

The share price declines make sense given how frayed apparel company investors’ nerves are. Clothing sellers have already been facing container shortages, factory shutdowns in Vietnam and increasing labor and transportation costs.

Levi’s commentary on the cotton-pricing issue should soften some of those fears—at least in the near term. On its earnings call Wednesday evening, the apparel company said that much of its own cotton prices have already been negotiated for the first half of 2022 and that it expects its cost of goods sold to increase 1% in the first half of 2022 compared with 2021 levels.

For the second half of 2022, the company said it might be able to negotiate prices that will lead to a mid-single-digit percentage increase in costs compared with 2021 levels. Cotton accounts for about a fifth of the cost of producing Levi’s jeans.

High cotton prices are certainly worth monitoring, especially if today’s prices stay elevated and impact negotiations for deliveries further out in the future.

The commodity’s historic surge in 2011, for example, ate into gross margins and profitability for some apparel companies that year and the year after. Levi’s gross margins declined by 2.2 percentage points in 2011, while Gap’s fell by 3.8 percentage points.

Those declines, however, also came during a period that Simeon Siegel, analyst at BMO Capital Markets, calls “promotional warfare.” That may have made it more difficult for apparel sellers at the time—especially those selling cheaper products—to pass on those costs to consumers.

Today, many apparel brands—including Levi’s—have regained pricing power, partly because retailers are unable to overstock inventory and because last year’s stimulus has left many shoppers’ wallets fatter.

Some brands also just have more cachet today, as Levi’s believes it does. Its average selling prices are up by more than 10% compared with 2019 and its gross margins are roughly 10 percentage points higher than they were a decade ago, during the last cotton price surge.

Levi’s comments seem to have assuaged investors’ fears, with its shares regaining some ground in after-hours trading. It isn’t an all-clear signal, of course. Apparel companies selling cheaper clothes, or those losing favor with customers, might not be as fortunate.

Hanesbrands, which sells basics such as T-shirts and underwear, saw gross margins expand by just 0.6 percentage points in its last quarter compared with the pre-pandemic quarter, while Zara owner Inditex’s margins increased by just 1.5 percentage points. Levi’s saw its gross margin grow by almost 5 percentage points last quarter compared with pre-pandemic levels.

Today’s soaring cotton prices might not be as challenging as they were a decade ago, but not all apparel companies will have the soft landing that Levi’s seems to have secured for itself.

Fertilizer Index Hits Record, Threatening Higher Food Prices

A gauge of North American fertilizer prices soared to a record high, driving up costs for farmers and threatening to worsen food inflation.

The Green Markets North America Fertilizer Price Index rose 7.9% to $996.32 per short ton, soaring past its 2008 peak to set a new benchmark for the index that began in January 2002.

Hyperinflation Concerns Top The Worry List For UBS Clients

The fertilizer market has been hit hard this year due to extreme weather, plant shutdowns, sanctions and rising energy costs in Europe and China, pushing prices past levels that traders and farmers hadn’t seen since the global financial crisis.

The energy squeeze in Europe and Asia has created a critical situation for the fertilizer industry, according to the biggest manufacturer in Hungary. Companies such as CF Industries Holdings Inc. and Yara International ASA have had to shut plants or reduce production as prices for natural gas, the main feedstock for most nitrogen fertilizer, have surged. In India, the government has directed producers to refrain from raising prices.

In Canada, the world’s largest canola exporter and a major wheat producer, farmers faced the biggest fertilizer price hike since 2015 in this year’s second quarter, according to Statistics Canada. Total farm input costs, which include machinery, seeds and feed expenses, rose in that period to the highest since at least 2002 on the government agency’s Farm Input Price Index.

The price spike of the crop nutrients deemed vital for producing enough food to supply a growing global population is stoking concerns of more inflation when many people still struggle to feed their families due to job losses and other lingering economic impacts from the pandemic.

Expensive fertilizer could push U.S. corn farmers’ cost of production 16% higher, according to Bloomberg’s Green Markets.


Updated: 10-11-2021

Inflation Clarity Doesn’t Mean the News Is Good

Disappointing labor data, spiking commodities prices and supply-chain headaches are scarier than Covid-19 for markets these days.

Doubts Return

The U.S. bond market took a day off to celebrate Christopher Columbus and Native Indigenous Americans, which was probably just as well. By the end of last week, the bond market was showing clear signs of losing its nerve over inflation again.

Moreover, this wasn’t a uniquely American phenomenon: German inflation breakevens, the implicit inflation forecast that can be derived from the bond market, are at their highest in eight years, even if they remain below 2%.

In the U.S., forecasts for both the next five years and the five years after that are close to the highs they touched during the brief inflation scare this spring.

But even if there is some clarity that inflation is a problem again, it’s not because of any overheating. Incoming economic data for the world as a whole have generally been disappointing for the last few months, and on balance they are now inflicting negative surprises.

Meanwhile, in the U.S., Robin Brooks, chief economist at the Institute of International Finance, notes data surprises are now running significantly negative.

Importantly, they are notably more negative than in 2013, when bond yields surged in apprehension of tapering of quantitative easing by the Federal Reserve. “The big stylized fact of the last few months is that the recovery from Covid is way slower than markets had been expecting,” Brooks said.

Note that he was talking about the economic recovery from the pandemic, not the medical one. After the successful vaccine tests in November 2020, almost a year ago, the stock market was able to look past the winter wave and ahead to the vaccination campaign, then began to pause with the onset of the summer delta wave in the U.S., still by far the most important economy.

But in the last few weeks, the global stock market has sagged even as cases have reduced sharply

Absent the arrival of a truly terrifying new variant that is lethal and also impervious to all the vaccines we have at present, it looks as though we have reached the point where the market is no longer that concerned about the pandemic’s medical progression. There is general optimism that it needn’t be as horrifically damaging in the future, along with pessimism that it’s bound to become endemic.

That raises the issue of just why bond yields are surging and the stock market is wobbling. Plainly the worry is that inflation is back, and it won’t be transitory. Handily, you can find the latest update of Bloomberg’s inflation indicators here.

The bottom line is that inflationary pressure is indeed broadening, and this shows up most clearly in commodities markets, in the labor market, and in complaints from businesses that they are wrestling with higher prices.

There will plenty more inflation talk this week, with U.S. CPI data for September due on Wednesday. Here are the main points to watch:


Energy prices are rising the world over, and this terrifies people. The echoes of the 1970s are obvious enough, even without the intrusion of Big Power politics as countries compete over resources.

However, the most eye-catching crisis, in the U.K., has seen some easing of the pain in the last few days. The main natural gas futures contract for the U.K. has roughly halved since its peak last Wednesday.

The fall seemed to start with a few words from Russian President Vladimir Putin about making more natural gas supplies available, which is alarming. But the fact remains that the most extreme energy scare to date has eased in intensity over the last few days.

Beyond that, the oil market has plainly hoovered up the most attention. But other corners of the commodity market may be more concerning. The Commodities Research Board RIND index covers a group of industrial materials that are not available on futures markets, and so may better reflect the pure pressures on supply and demand into industry, rather than picking up speculative flows driven in other markets. It includes commodities such as burlap, tallow and lard.

The surge in prices is still not quite as great as the rise that brought it to the previous peak in 2011, just before commodities lapsed into a decade-long bear market. But the signs of pressure are unmistakable.

Then there is the move in industrial metals, which are normally driven by demand from China. At present, China is trying to douse speculation in metals, but that hasn’t stopped a surge in prices. Bloomberg’s industrial metals index is now at its highest since early 2012

In the indicators, note that they are driven by levels, rather than percentage increases. This is on the theory that it is high absolute prices that create economic damage. Had we based the indicators on rates of increase, which is what many in the market tend to watch, the heat map would be implying much more inflationary pressure than it currently shows.

The Labor Market

The other factor raising inflation fears is the labor market. The non-farm payroll data, published last week, include figures on the rise in average hourly and weekly earnings.

Despite the disappointing rise in payrolls, the data showed earnings continuing to rise healthily. In itself, this is a positive development that may yet alleviate much social tension. But it also implies inflationary pressure.

There are two problems with the data. One is the compositional effect. The most poorly paid workers tended to be laid off during the Covid shutdown last spring, with the result that the average earnings of those left shot up. A second issue concerns base effects. Comparing to 12 months ago risks a false comparison with an extreme low.


Updated: 4-28-2022

U.S. GDP Falls 1.4% As Economy Shrinks For First Time Since Early In Pandemic

Supply disruptions weighed on the economy, but consumers and businesses continue to spend.

The U.S. economy shrank in the first quarter as supply disruptions weighed on output, but underlying strength in consumer and business spending suggested growth will soon resume.

The decline in U.S. gross domestic product at a 1.4% annual rate marked a sharp reversal from a 6.9% annual growth rate in the fourth quarter, the Commerce Department said Thursday. The first quarter was the weakest since spring 2020, when the Covid-19 pandemic and related shutdowns drove the U.S. economy into a deep—albeit short—recession.

The drop stemmed from a widening trade deficit. Imports to the U.S. surged and exports fell, dynamics reflecting pandemic-related supply-chain constraints. A slower pace of inventory investment by businesses in the first quarter—compared with a rapid buildup of inventories at the end of last year—also pushed growth down.

In addition, fading government stimulus spending related to the pandemic weighed on GDP.

Consumer spending, the economy’s main driver, rose at a 2.7% annual rate in the first quarter, a slight acceleration from the end of last year. Businesses also poured more money into equipment and research and development, triggering a 9.2% rise in business spending.

“The domestic economy remains remarkably resilient,” said Diane Swonk, chief economist at Grant Thornton. But, she said, “this is not a fairy-tale economy.”

The GDP report is unlikely to change the Federal Reserve’s plans to raise interest rates rapidly this year, including by a half-percentage-point at a two-day meeting next week. One Reason: The report is likely to add to concerns that the economy is growing too fast. Private demand in the first quarter grew at a 3.7% annual rate, well above the 1.8% growth rate the Fed expects for the overall economy over the long run.

U.S. stocks rose sharply on Thursday, with technology stocks in the lead, after Facebook parent Meta Platforms Inc. posted solid earnings despite high U.S. inflation.

Two years after the pandemic struck, the U.S. economy faces challenges, including supply disruptions related to the pandemic and Ukraine war, labor shortages and high inflation.

Many economists think that the economy can withstand higher interest rates and return to modest growth in the second quarter and beyond, in part because consumers and businesses are continuing to spend.

Consumers are spending more on services amid lower Covid-19 case totals and the lifting of remaining pandemic restrictions. Travel is a key example: U.S. hotel occupancy was at 65.8% for the week ended April 23, up from 49.6% at the end of January, according to STR, a global hospitality data and analytics company.

More people are also boarding planes following a slowdown in air travel amid the Omicron wave. About 2.1 million people passed through airport checkpoints in late April, up from 1.4 million three months earlier, according to the Transportation Security Administration.

George Lewis, co-owner of Brass Lantern Inn in Stowe, Vt., is seeing a surge in demand. Visits to his bed-and-breakfast on Maple Street are running strong, with rooms selling out some weekends this spring, a sharp shift from earlier in the pandemic when the inn relied on small-business aid to survive.

“People have called up: ‘Are you really sold out?’ ” Mr. Lewis said. “I’m like, ‘Yeah, yeah, we’re really sold out.’ ”

Still, Mr. Lewis is more concerned about business next year. For one, it isn’t clear where inflation will be, he said. Prices have already risen briskly for heating oil to warm rooms, as well as for the cheddar cheese Mr. Lewis uses in egg strata, a breakfast casserole he serves up on Saturdays.

Consumer spending is another wild card, he said.

“We don’t know what people’s pocketbooks can accommodate after this year,” he said. “Some people are spending…independent of what the cost is.”

Looking ahead, economists surveyed by The Wall Street Journal estimate GDP rising 2.6% in the fourth quarter of 2022 from a year earlier, matching 2019 annual growth, but logging in well below 5.5% growth recorded last year.

The labor market is a key source of economic strength right now. Jobless claims—a proxy for layoffs—have been near historic lows and fell last week to 180,000 as employers clung to employees amid a shortage of available workers. Businesses are hiring and ramping up wages, supporting consumer spending.

High inflation, though, is cutting into households’ purchasing power. Consumer prices rose 8.5% in March from a year earlier, a four-decade high.

Elevated inflation is wiping away pay gains for many workers: average hourly earnings were up 5.6% over the same period.

Fast-rising prices are also challenging many businesses.

Cratex Manufacturing Co., a 100-person manufacturer, makes and sells industrial abrasives for other manufacturers to use in the production of steel mills, jet-engine blades and metal castings. The San Diego-based company has seen prices for materials it buys—such as resin and rubber—rise between 5% and 30% since last fall, said Ricker McCasland, president of Cratex.

At the same time, Cratex has had to ramp up wages to retain workers.

“It’s a race to stay ahead of all of those increasing costs,” Mr. McCasland said. He added that price increases for raw materials have outpaced Cratex’s ability to recoup them through its own price increases.


Updated: 4-28-2022

Dismal GDP Report Raises The Odds Of A Recession This Year

Bloated inventories held the economy back in the first quarter and will take many months and discounting to shrink.

The weakness in the economy spawned in part by the liquidation of bloated inventories has only just begun. The Commerce Department’s preliminary estimate of first-quarter growth Thursday showed that gross domestic product unexpectedly shrank at an annualized rate of 1.4%. Of that, 0.84 percentage point was due to a reduction in business holdings of goods.

None of this should be a surprise. As far back as December, there were signs that a build-up of excess inventories in the last half of 2021 would lead to a cut in production and orders after American businesses stockpiled goods in anticipation of robust holiday sales that ended up being rather tepid.

Of the 2.3% growth in the third quarter of 2021, 2.2 percentage points was due to inventory-building and 5.3 percentage points of the fourth quarter’s 6.9% gain.

But consumers held back. Real personal consumption expenditures, which accounts for 71% of total GDP, rose just 1.3% in the third quarter and 1.8% in the fourth. And followed by only a 1.8% rise in the first quarter, there’s still lots of inventory yet to be unloaded.

Real retail sales fell 0.7% in March from February and consumer confidence in the future plunged 28% in April from a year earlier, according to the University of Michigan’s sentiment survey.

Supply of goods will increase even as demand weakens. Some 60 ships with imports from Asia are waiting to be unloaded at the Ports of Los Angeles and Long Beach, according to the Marine Exchange of Southern California. Those “floating inventory” vessels are down from the January peak of 109, but are still about triple the earlier norm.

Also, there are hidden inventories in the guise of partially-built vehicles that will hit the market when the computer chips needed to complete them arrive.

Households also hold excess inventories. While at home during the pandemic, they bought lots of exercise equipment, televisions, computer games and kitchen appliances. That pushed up spending on durable goods 18% last year. It will be years before those goods wear out. Meanwhile, look for profit-killing markdowns as businesses work off excess inventories.

Further declines in economic activity will reduce inflationary pressures as will the easing of supply-chain bottlenecks and waning frictions from reopening the economy. Also, economic weakness will probably retard the Federal Reserve’s credit-tightening campaign.

Nevertheless, the central bank has been behind the inflation curve and will no doubt continue to raise interest rates and shrink its portfolio of bonds until it sees the whites of the recession’s eyes.

Decades ago, business cycles were largely inventory cycles. But inventories only exist in goods since services are consumed as produced. Now, consumer services are 61% of consumer spending, up from 39% in 1947, while goods purchases have dropped from 61% of the total to 39%.

Nevertheless, inventory cycles will exist and the current one will probably speed up and intensify the business downturn I’ve been predicting to start this year.



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