Friday, October 29, 2010

Prices Paid in Chicago PMI Escalate at "Unimaginable Rate and Pace"

Inflation continues to be non existent in Bernanke's eyes (otherwise he'd have no cover for QE2).  However the real world continues to scream otherwise.

In this morning's Chicago PMI prices paid surged from 55.0 to 68.9!

The verbiage:  “Raw material prices escalating at unimaginable rate and pace.”


Most of us focus on the CRB commodity index for an inflation gauge, which is not near 2008 highs due to its energy weightings.

However, there is another index called CRB Rind (hard to find a symbol I can chart) but this essentially excludes energy (nat gas & oil) and as of late September was already above mid 2008 highs (which was the peak of the speculative commodity blow off top)...

The CRB RIND is a Raw Materials Index published by the Commodity Research Bureau. The index consists of the following 22 raw materials:

Burlap, Butter, Cocoa beans, Copper scrap, Corn, Cotton, Cottonseed oil, Hides, Hogs, Lard, Lead scrap, Print cloth, Rosin, Rubber, Steel scrap, Steers, Sugar, Tallow, Tin, Wheat, Wool tops and Zinc.

"The Spot Market Price Index is a measure of price movements of 22 sensitive basic commodities whose markets are presumed to be among the first to be influenced by changes in economic conditions. As such, it serves as one early indication of impending changes in business activity.

So to review - as long as you don't eat, use energy, clothe yourself, [Oct 17, 2010: Get Your Cotton On] pay healthcare premiums, pay tuition at a university....or require any minor or major commodity in your life (excluding natural gas) you are good.  There is no inflation in your life.  Go forth and buy homes - they are in deflationary mode.  Otherwise, you're out of luck.  Unless you live in the Federal Reserve ivory tower textbook, where all this data is just a mirage. 

Again, I will stress this is a repeat of late 2007 to mid 2008 - the only thing missing is the $140 oil.  Profit margins are going to be squeezed as this begins to filter through the system - the Chicago PMI is already showing it.  (remember, my outlandish theory is as corporations work to protect profit margins, as input prices surge they will begin a new round of labor cuts - thanks Ben!)  And we have not even BEGUN QE2 yet.  Watch the restaurant stocks [Sep 19, 2007: Tough Times Ahead: Restaurants?]  [Oct 31, 2007: Food Inflation Starting to Hit Restaurants] and others that don't have pricing power, but must continue to absorb higher prices; they were my canary in the coal mine in 2007 as the market raced along confident Ben had the solutions to all our problems.  Sound familiar?

Middle class consumer squeezed along with skyrocketing inputs for their food doesn't bode well for profit margins in this group as a whole. We have the cheese inflation, the dairy inflation, the corn inflation and now the wheat inflation.

Speaking of.... remember 2003 and the last man who had the solutions to all our problems?  The Fed was fighting a phantom called deflation with 1% interest rates.  How did that turn out the next 5 years?  That is a cupcake compared to what Ben is doing.  Boy oh boy, we're going to have a fun decade ahead.  Onward guinea pigs. 

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