March 19, 2004     Inflation ? Not according to the Government Part II

 

After the Bell, we heard a profit warning from Smurfit Stone .  The profit warning was related to escalating costs.  The headline of the March 19th  issue of The Kiplinger Letter reads:  "Higher costs will hit businesses hard this year. Firms face rising bills for energy, shipping, insurance, steel and other materials. That will dampen 2004 job growth. The U.S. will add only 1.5 million jobs, half the annual average from 1994 to 2000. And it will curb profits, holding gains for big companies to an average of 12%. "

 

"But nearly all businesses will be pinched by higher energy costs. They're trimming profits at companies of all types, large and small. Prices of widely used industrial metals are also heading up. Steel will hit $450 a ton by April, ease by fall and end 2004 near $400. And there's no end in sight to increases for aluminum, copper and nickel. China is gobbling up metals, and environmental regs constrain new mining."


"Trucking rates are set to jump as much as 10% with new regulations limiting the time drivers spend behind the wheel."

 

"Small businesses can expect health premium hikes of 14% to 15%
both this year and next, easing from jumps of as high as 20% last year. Workers' comp rate hikes will average 8% to 9% after a 15% rise in 2003. There are exceptions: Reforms in Calif. and Fla. will CUT rates. New corporate governance rules add expenses. Firms with revenues of less than $500 million will spend up to $780,000 each on new controls. "

"All this adds up to higher inflation at the producer level.
For consumers, prices will rise 2.2% in 2004 compared with 1.9% in 2003. Firms probably won't be able to pass along costs until late 2004, setting the stage for faster inflation and interest rate gains in 2005."

 

 

 

 

March 19, 2004     Inflation ? Not according to the Government

 

It has been bothering me. Why are we seeing increases in many prices, yet Government claims low inflation. I am speculating as to what the answer is. I think that businesses are seeing inflation. How could it be missed? But, in general, I do not think that the rising costs have been passed on to the consumer, at least from the most recent governmental reporting periods. Of course, CPI is a few periods behind, and always subject to refinement and often material adjustment. Hence, it might make sense that once government reports that businesses are passing it on, then we will see inflation in the CPI numbers. Some might argue that businesses will adjust and not pass it on. If that is the case (and certainly possible), you will see businesses , such as Bed, Bath and Beyond reporting decreased earnings, and blaming margin pressures from rising costs.