More, Less Cute, Stories about Inflation

A reader once suggested this blog should be called “Cute Stories about Inflation.”

That was his response to multiple pieces over an extended period of time in which I had pointed out the decoupling of government-reported inflation statistics from the actual rising cost of gasoline, heating oil, natural gas, steel, copper, concrete, glass, plastic resin, zinc and other industrial inputs, not to mention health insurance, car insurance, flood insurance, homeowner’s insurance and medical malpractice insurance, plus housing related items such as homes, lumber, appliances, asphalt shingles, cable television—well, you get the idea.

My point was not unique or particularly insightful—after all, many observers had discussed the same thing for some time.

Indeed, some of the more grumpy, perma-bear, gold-bugs I know took it all as yet one more dark sign that the entire system is rigged; that the government puts out whatever statistics it wants to put out in order to make the maximum number of market participants wealthy; and that Alan Greenspan and his successor are nothing more than pawns in a giant game of Squeeze-the-Shorts.

And for a while it looked like the Conspiracy Theorists might be right, because despite the persistent rise in the cost of all those aforementioned items, the various price indices—particularly when “adjusted” to exclude food and energy, which the government as well as bond buyers deem too volatile to pay attention to—stayed at or near historic lows for longer than it seemed possible

All the while, the consensus in The Market held that as long as America’s 100 Million Dollar CEOs could keep outsourcing not only manufacturing but also, as in recent years, telemarketing, contract research and anything else that didn’t threaten their own bloated pay structure, then the wage growth of working stiffs in the U.S. would remain close to zero, and the “core” inflation rate—unlike the South—would never rise again.

Now, for the record (and for those who grew weary of my “cute stories about inflation”), I actually posted the last of my inflation updates in May—six months ago.

It was called “Don’s CPI,” and it reported on the fact that Don, my car guy, had raised his prices by 6%. This meant two things: it meant that instead of costing us $700 every time we take in a car to Don’s, it was now going to cost us $742; and it told me that inflation was real, it was happening, and it was here to stay.

(It’s true: no matter what we take a car in for—oil change, wiper blade, tune-up—it used to cost $700, which is now $742. But Don does great work, and the way I see it, cars are life-or-death conveniences, not toaster-ovens. So I don’t screw around when it comes to keeping them in shape, nor do I begrudge Don sending his several fine children to college on us.)

Around the time of that piece there was a coincidental awakening of the bond market and the Fed to higher inflation rates creeping into government statistics, adjustments or no adjustments. This spooked the markets and led to an extended and hopeful debate as to when the bursting of the U.S. Housing Bubble might ease the upward price pressure.

Since everybody else was talking about inflation, I decided to let sleeping dogs and “cute inflation stories” lie.

But now that the Housing Bubble has been burst in a far more spectacular manner than generally expected, markets appear convinced all is well and inflation is contained, and I feel the time is right to pass on another, not-so-cute inflation story.

It comes from a private equity guy whose firm owns several companies in the heartland of the American industrial supply chain.

And one of his companies with operations in the still-hurricane-rebuilding Gulf Coast recently raised wages 12% in order to retain workers it was not otherwise able to retain, owing to the many better offers they were receiving.

This was not, I should make clear, a 12% wage increase for a CEO or a CFO, which nobody at the Fed or in the bond market or at the White House would blink an eye at.

This was a 12% wage increase for hourly American workers whose jobs can not be outsourced, no matter how fast the T-1 line between Bangalore and Chicago.

I should also note that according to my contact, the company in question was able to raise prices to cover that wage increase, “no problem.” Lest you think this data point should be dismissed because it covers just one company in one region of the country, my private equity contact tells me all his portfolio companies have likewise been able to put through price increases with no resistance.

For the record, the current 10 year rate is 4.6%.

A year ago August—in response to a snide question about when I was going to put my negative views on the U.S. Housing Bubble into the form of a market call on homebuilding stocks, which is something I am not in the business of doing here—I wrote that ‘anybody who buys a house they don’t need is an idiot.’

I don’t think that was bad advice.

And while I am no more inclined to make a bond market call today as I was making a homebuilder call back then, I’ll say this: given the accelerating rate of wage increases in the U.S., the rising cost of products sourced from Asia, and the global call on natural resources that’s keeping prices high despite the collapse in spec housing in Reno Nevada and condos in Miami Beach, I have now come to think—for what it’s worth—that anybody who buys a bond they don’t need is, down the road, going to regret it.

Perhaps, some day, those grumpy, perma-bear gold-bug friends of mine are going to be right.

Jeff Matthews
I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.