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This morning's Producer Price Index (PPI) numbers suggest that the stagflation is in full force. PPI was expected to rise 0.3% for January, and it came in way above at 0.8%. This result, which was much bigger than expected, was due to a 3.7% surge in energy prices with gasoline prices jumping by 15% -- the biggest gain in 14 months. Core PPI -- excluding gasoline and food -- was forecast to creep up 0.1% and it came in at +0.4% in January.
I was expecting PPI to rise but core PPI to drop. Unfortunately, it turns out that many companies were raising prices even as sales slumped. Auto, computer and pharmaceutical makers were among the industries boosting prices in January even as sales fell. Why did they do this? It could be because they needed to make up the revenue that they knew they would lose due to declining unit sales by raising prices on people who had to buy their products.
This is the very essence of Stagflation which pairs slow or declining economic growth with rising prices. There is really nothing more miserable for an economic actor than stagflation, and it makes very little sense for it to exist. The only explanation is that the declining number of people who can afford to buy will pay more money to cover the higher costs of serving them. This is why colleges are raising tuition on those few who can afford to pay in the wake of their declining endowments.
But I'm still trying to make sense of why gasoline prices are up so much despite crumbling demand and a relatively low price of oil. I am paying $2.02 for mid-grade instead of the $1.66 I paid in December even though oil prices are at $35.Could it be that refineries are taking themselves offline for seasonal maintenance -- thus reducing supply temporarily? Or is it because the prices of Middle Eastern crude are higher than the U.S.-produced crude that is piling up in places that are deemed too expensive to ship to refineries?
All I know is that if the economy keeps shrinking and prices keep rising, something has to give. Because people without jobs are not going to be able to afford to buy goods whose prices keep going up. And that will mean that the companies that make those goods are going to have to slash their production unless they want more unsold inventory piling up.
In short, when inflation spikes on stagflation -- people find themselves in the middle of a steaming pile of misery.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing.
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Reader Comments (Page 1 of 1)
2-19-2009 @ 12:51PM
william lindblad said...
The pile of misery is going to get larger.
Price increase in gas is due to lowering refinery capacity. You know, like in manipulation. The oil companies do this on a regular basis. Remember 73, the tankers were sitting low in the water with anchors out - in Delaware Bay. That is why we had to wait hours in line to get 5 gal's, there was a SHORTAGE. Years ago I counted fourteen while on the Cape May Ferry. I don't want to get into this too much more as it still makes me angry. I guess the Coast guard and the rest of the government had no idea this was happening? Do not wonder why we have problems. Remember the "excess profits" hearings. Hindsight, hindsight. Congress to the rescue.
I suggest that you add the food stores to the drug makers list. Rises have been steady and going on for months. The frozen food area was cheap for a while as the warehouses were getting cleaned due to the price of fuel. (the have to use electric to run the chillers, which are LARGE ac units) Most of these operations can be sectioned to reduce cost, but you have to reduce inventory to accomplish this.(watch what happens when they re-stock) The rest of the increases are due to ethanol, fertilizer and a bunch of smaller items, but they all add up when it hits the shelf. This area is in full inflation mode and none of us can get away from it. It just does not make the news.
With monumental stimulus packages, the Fed throwing billions around, a sinking economy and the prospect of summer being of the Australian variety (they are in summer), we have a good deal to be concerned about.
Although I forget who made it - "you ain't seen nothing yet" is a famous quote.
It may prove fitting.