The Fed claims inflation will be “transitory” … a slew of references to inflation from corporate America… is the Fed eyeing real-world inflation?

Yesterday, the Federal Reserve told us once again not to worry about inflation. Though it’s rising, we’re told it will be “transitory.”

From the Fed’s press release:

Inflation has risen, largely reflecting transitory factors…

An important follow-up question might be “what does ‘transitory’ actually mean?”

The Google definition reads: “not permanent.”

By that standard, the runaway, destructive inflation of the 70s was also “transitory” since it died off in the 80s.

But maybe I’m being too nitpicky here. So, for the moment, forget definitions and what duration “transitory” represents.

Instead, let’s look at the extent to which inflation is actually here and impacting our economy.

Perhaps the recent headlines suggesting its arrival are worse than the reality?

***What corporate America is saying about real-world inflation

Below are various inflation-related comments from the earnings transcripts of some of the biggest companies in the United States.

If anyone has a pulse on real-world inflation, it would be the C-level executives of the companies below, who do business in the language of numbers.

Honeywell: Inflation “is taking hold. That — there’s no doubt about it. We knew it. We see it.”

Dover: “… I get it that the Fed doesn’t want to recognize inflation. But there is inflation.”

PepsiCo: There “is certainly higher input inflation, but it’s been factored into the ’21 guidance, notably, in terms of agricultural and packaging …”

Celanese: “I mean, we’re certainly feeling the inflationary factor.”

Kimberly-Clark: “… sharp rises in input costs …”

Snap-on: We’ve “got material inflation in these numbers.”

Coca-Cola: We’re “closely monitoring upward pressure in such inputs such as high-fructose corn syrup, PET, metals, and other packaging materials …”

Procter & Gamble: “The commodity challenges we face next year will, obviously, be larger next fiscal year.”

Boston Beer: The “input costs are going up because the phase is still coming into our costs of materials and ingredients and packaging materials.”

GATX: The “increased price of steel is increasing the cost of a car across the board.”

Crown Holdings: Delivered “aluminum in North America at round $1.28 a pound versus $0.75 last year at this time, so an increase of 70%.”

Steel Dynamics: “… higher average selling values were offset by significantly higher input costs.”

Mattel: “… despite the cost inflation we’re seeing and the impact it’s having on gross margin …”

Whirlpool: Our actions “will offset the impact of global supply constraint and rising input costs.”

Sonoco Products: “Our industrial segment was hit the hardest with price/cost challenges due to the higher OCC costs.”

Stanley Black & Decker: in an earnings call presentation slide entitled “Commodity Inflation Update” it reads steel, resin, base metals, electrical components and batteries are pushing incremental inflation for 2021 up by $160M vs. January guidance.

Phew…

Anecdotally, it appears that inflation is very much here…and having an economic impact.

By the way, an impact on who, exactly?

Well, look at Coke…

From CNBC (emphasis added):

Coca-Cola will raise prices on its drinks to combat the impact of higher commodity costs, its CEO told CNBC on Monday…

The beverage company joins a number of other consumer giants, such as Kimberly-Clark and J.M. Smucker, in hiking prices.

While the move will help their profit margins, it may come at the expense of cash-strapped consumers who are still struggling from the economic impact of the coronavirus pandemic.

***Speaking of inflation and those cash-strapped consumers…

You have to love the line from Barron’s earlier this week:

There are economic models, and there is real life.

Well-said.

So, what is happening with inflation in real life?

Back to Barron’s:

Over the past week alone, the price of corn rose 8% to the highest level since 2013, while soybeans and wheat prices hit their highest points since 2014.

The CRB foodstuff index, which includes hogs, butter, and sugar, in addition to grains and other agricultural commodities, is up 15% this year and trading at the highest level since summer 2012.

Grocery prices are in turn at seven-year highs.

Meanwhile, the price of an existing home surged 17% in March from a year ago—the fastest pace on record.

The official inflation numbers favored by policy makers, and thus the focus of traders and investors, don’t exactly capture those stark price increases.

The Federal Reserve and many economists emphasize core inflation, or indexes that exclude food (and energy) prices, because those components can be volatile.

As for housing, government economists consider homes an asset, not a good or service that is consumed, and so home prices don’t directly figure into carefully watched inflation gauges.

Given that core inflation numbers don’t include some of the biggest line items of a family budget, it’s almost like we’re talking apples and oranges. So, the Fed says inflation will be transitory – but by their definition, they’re not even talking about food, gas, and homes. Well then, how transitory will the inflation be that everyday people like you and me feel? Is that even being discussed?

***By the way, why does the Fed think inflation will be transitory?

Here’s an answer from CBS:

One reason Powell has said he thinks the inflation pressures building in the U.S. economy will prove temporary is that, for now, most Americans don’t expect prices to rise much in the long run.

But once expectations for inflation do rise, they can be self-fulfilling: Workers start demanding higher pay to offset expected price gains, and retailers begin raising prices to offset increased wages and supply costs. This can set off a wage-price spiral, something the United States last experienced in the late 1960s and 1970s.

I wonder why Powell thinks that most Americans don’t expect prices to rise much. Especially when we just highlighted how the costs of items that have a direct impact on most Americans’ wallets are soaring.

Aren’t we in danger of consumers seeing these “real world” price increases and it shaping their expectations about inflation?

Here’s what Barron’s thinks:

Consider that food and housing together represent 27% and 33% of household income and spending, respectively, Labor Department data show.

The problem worth contemplating is that those real-world prices shape the inflation expectations that wind up determining actual inflation.

Here, perception becomes reality.

Francesco D’Acunto, a professor at Boston College, has found that inflation expectations are shaped by the price changes consumers face specifically while grocery shopping.

Grocery price inflation is at this point running about 3%, meaning consumers believe inflation is running about double the reported core consumer-price-index rate, he says.

The average person probably doesn’t consider supply-chain issues that have helped push the price of pork chops 9% higher, and D’Acunto’s research shows it takes six to 12 months before inflation expectations change dramatically. Given food increases to date, that point is two to three months out, he says.

“What matters is what households think,” says D’Acunto. Excluding the very items to which consumers are most exposed means policy makers may “find themselves basing policy on assumptions that are totally off,” he says.

***Regular Digest readers know that we’re concerned about inflation

A few weeks ago, we brought you an important essay on inflation written by our CEO, Brian Hunt. It details how inflation is already causing certain asset prices to soar – if you missed it, I encourage you to read it by clicking here.

And this past Tuesday, we featured an interview between Brian and our macro specialist, Eric Fry, in which they discussed inflationary pressures among a variety of other topics.

As we noted in that Digest, “Eric says there is inflation happening in the real world that people are feeling, no matter what the government is telling us.”

So, what can you do to protect your wealth from all this?

Simple – move a substantial portion out of the dollar and into assets that are growing in value.

There’s bitcoin and top-tier altcoins…

There are the stocks of high-quality businesses that have the ability to raise their prices to match inflation…

There’s real estate… emerging market stocks… precious metals (even though gold has been weak in recent months) …

There are even collectibles – coins, wine, vintage cars, artwork…

There are many assets that will do the trick, but they all serve the same purpose – they help you retain the purchasing power of your wealth as the dollar slides.

To be clear, you don’t have to bail on your cash tomorrow. These inflationary forces will develop over quarters and years, not days. But the dynamic is in motion…just ask any of the CEOs from earlier in this Digest.

So, while much of America cheers their stimulus checks and doesn’t pay attention to the enormity of new dollars flooding our economy, inflation is picking up steam.

We’ll wrap up today by revisiting French businessman and economist, Frederic Bastiat (1801-1850):

When false money, under whatever form it may take, is put into circulation, depreciation will ensue, and manifest itself by the universal rise of everything that is capable of being sold.

But this rise in prices is not instantaneous and equal for all things. Sharp men, brokers, men of business, will not suffer by it; for it is their trade to watch the fluctuation of prices, to observe the cause. And even to speculate upon it.

But little tradesmen, countrymen and workmen, will bear the whole weight of it.

The rich man is not any richer for it, but the poor man becomes poorer by it.

Have a good evening,

Jeff Remsburg