2011 April 03 Sunday
Wal-Mart: Serious Inflation Coming To United States

Wondering when the big US Federal Reserve bond buying sprees would cause consumer price inflation? Or are you more like me and wondering when the meat price increases and clothing price increases you have seen will get reflected in mainstream media discourse? Wal-Mart's US CEO has an unhappy message to deliver: You are going to get poorer.

Still, inflation is "going to be serious," Wal-Mart U.S. CEO Bill Simon said during a meeting with USA TODAY's editorial board. "We're seeing cost increases starting to come through at a pretty rapid rate."

Inflation is already going up faster than earnings. Hard to sustain an economic recovery unless oil prices stop rising.

Average hourly earnings in March were flat compared to the previous month for the second time in a row. On an annual basis, income increased by just 1.7 percent.

Meanwhile, consumer price index data released two weeks from now could show a jump in prices of as much as 2.6 percent year-over-year, according to an estimate from the Bank of Tokyo-Mitsubishi UFJ.

Energy prices are eating up wage increases and then some. So consumer spending can not power an economic recovery. There's a substantial risk of falling back into a recession.

Mark Zandi, an economist for Moody's Economy.com, just met with some consumer products company executives and found they are all getting ready to jack up prices. By June the surges in producer prices, driven by commodity price spikes, will filter thru to the retail level. You have been warned.

"They were all on the verge of jacking up their prices," he said. Price increases are not always seen as bad though. When companies have pricing power, it often means there is some traction in the economy, but it's a fine balance.

So if you were thinking about buying something this summer you might want to buy it now - at least if you think you can count on your job still being there. Which leads me to a quantitative blog I just came across. Cheryl Russell of Demo Memo finds a decline over the last decade in the percentage who think it "not likely" they will lose their job in the next 12 months.

2010: 52%
2008: 59%
2006: 64%
2004: 64%
2002: 63%
2000: 71%

This ties in with why wages are not keeping up with inflation. With a huge world supply of labor capital has the upper hand in wage negotiations.

"Companies are in the dominant bargaining position," said Paul Ashworth, chief U.S. economist at Capital Economics, a consultancy. "They don't have the added problem of paying more for their wages as well."

But even if capital did not have the upper hand Peak Oil is going to cause a big decline in living standards.

The inflation rate in South Korea is almost identical to the inflation rate in the United States in 1971 when Richard Nixon imposed wage and price controls.

In March, the consumer price index rose 4.7% from a year earlier, accelerating from the preceding month's 4.5% rise, according to data from Statistics Korea.

Europeans have greater trust in the Euro central bank's dedication to control inflation than Americans have. Will the European Central Bank keep inflation down even at the lost of losing some Euro zone members? In spite of that faith Euro zone inflation is now well above the under 2% target of the European Central Bank. Also, in the most recent 3 months inflation has been galloping along at 5% due to energy prices.

Annual euro-zone inflation rose to 2.6% in March from 2.4% the previous month, European Union statistics agency Eurostat said, surprising many economists who had expected no change from February.

Euro zone interest rates are going to go up. The Fed has a choice to either follow or let inflation get out of hand. In the next recession caused by an oil spike we are going to into it in much worse shape than we went into the last recession. Governments will be too poor to use fiscal stimulus. It'll be all they can do just to pay unemployment benefits while cutting old age benefits. Will they raise taxes in a recession or slash welfare state spending? Will policy makers opt for inflation to unload some of their debts?

Share |      By Randall Parker at 2011 April 03 02:03 PM  Economics Business Cycle


Comments
RX said at April 3, 2011 4:35 PM:

Here is to hoping that human ingenuity will overcome Peak Oil. Lawrence Berkley National Laboratory has made a breakthrough on hydrogen storage:

http://www.hydrogencarsnow.com/blog2/index.php/hydrogen-fuel-storage/magnesium-and-plexiglas-hydrogen-storage-breakthrough/

The storage technique does not require high pressures or cryogenics. A hydrogen economy would require nuclear power plants most likely. At night time during off peak demand, the electricity generated would be used to make hydrogen.

Liquid carbon based fuels are great for easy storage and energy density. However, if we had to (for transportation sector) we could burn coal dust directly in a cyclone engine: http://www.cyclonepower.com/

With regards to oil, the real question is “what economic output does that barrel deliver?” If you have a highly efficient economy, then you can survive high priced oil. If your economy squanders the energy content in a barrel of oil, then high priced oil hurts. In the U.S., with our vast distances and low density population centers, we need cheap transportation fuel. Otherwise, we will have to re-organize our cities and be dependent on mass transportation.

Luke Lea said at April 3, 2011 5:06 PM:

It will be interesting to track the regress of American wages relative to times past -- e.g., for non-supervisory hourly wage workers, what is their real hourly take home pay today compared to what it was in 1970, 1960, etc..

RX said at April 3, 2011 5:25 PM:

“Capital has the upper hand in wage negotiations.” Sad but true. We desperately need a money system that allows labor to keep their wealth. Such a system should have these features (1930’s Chicago plan): 1) 100% reserves in private banks. This means that private banks loan out your savings, like most people think they do now anyway. Private banks will no longer will be able to create new debt money out of thin air. 2) All new money originates at the Treasury, and it is tightly controlled by Law. 3) The Treasury becomes another branch of government, so it is immune from the populism of Senate and House. 4) Repeal the 17’th amendment, so the Senate is no longer populist. 5) Use a bancor (bank trading system) that allows your sovereign money to only circulate in your economy. This means no more floating exchange rates.

HR6550 had some of the above features, but only lasted a few weeks in the house.

The Cost of Capital in our current system is about 40%. You work about half your life to service debt, and these interest costs are buried in every transaction. For example, a house may cost 100K, but will be 300k over the life of the loan. The Capital costs for the house was 200%. Not all industries borrow, so the overall cost of Capital to the economy is lower than 200%, but still a very significant 40-50%. This puts lots of power into the hands of finance capitalism, which I call pariah capitalism. Pariah capitalism will seek out returns (cheap labor) in order to service debt money. Pariah capitalism will also grow the money supply to service itself. Today’s world is a good example of that. (Since China has a large percentage of debt free money in their economy, they do not chase as much debt. This is why they have low wages but are not poor.)

We just put the industrial revolution into hyper-drive with the advent of high tech computers and telecommunications. We are producing goods and services at an accelerating rate, yet we are getting poorer, as we run ever faster to service debt. Those at the lower end of the wage scale, or those who do not have assets that appreciate with the expanding money supply, fall off of the treadmill.

Jeff Maylor said at April 3, 2011 5:26 PM:

Follow up question on Peak Oil: What about the role of the Fischer-Tropsch process to get oil from coal? It is my understanding that it becomes economically viable at about $50-60 per barrel. It takes a big investment up front and investors have to know oil won't come crashing down again. But once it became obvious that oil was going to be north of $60 forever, wouldn't there be a switch to coal? I know there are environmental problems with coal, but China doesn't seem to care much and they have lots of coal. And if gasoline were to go to $6 or $7 a gallon, we wouldn't either. Doesn't this put an upper limit to how bad dwindling oil can affect the economy?
I got my information from the book "Physics for Future Presidents" a nifty little book I recommend for people out there.

fascist blogger said at April 3, 2011 5:36 PM:

"In the next recession caused by an oil spike we are going to into it in much worse shape than we went into the last recession. Governments will be too poor to use fiscal stimulus. It'll be all they can do just to pay unemployment benefits while cutting old age benefits. Will they raise taxes in a recession or slash welfare state spending? Will policy makers opt for inflation to unload some of their debts?"

A recession caused by peak oil related difficulties would ultimately be supply-side anyhow. Fiscal stimulus, insofar as it works at all, works by increasing aggregate demand when there is slack in terms of demand. Boosting aggregate demand cannot substantially ameliorate a supply-side downturn. So government being too poor to use fiscal stimulus shouldn't concern anyone. Also, aggregate demand can be stimulated easily and quickly to any level desired using monetary policy alone. For instance, if the government were to print trillions of dollars of new money and put it into the economy (there are many ways to do this!) they can stimulate as much demand as they desire. There is basically no limit to how much money can be printed. The more money is printed and injected into the economy, the more demand is created -- without limit! Of course, injecting huge amounts of money into the economy would generate inflation but that is what necessarily happens when aggregate demand increases regardless of the source of the increase in aggregate demand. Increasing prices is the goal of stimulus not an undesirable bi-product. Higher prices induce production (when there is slack associated with weak aggregate demand).

RX said at April 3, 2011 7:23 PM:

A person cannot consume more than their output. If the economy were a big grocery store, then everybody would put their output on the shelves, and other people would purchase and consume. In effect, you cannot trade more than your own output. If you do consume more than your output, then you are borrowing from somebody else.
If money is a store of value, the aggregate demand is equal to the desire to trade outputs. For example, if productivity went up, and the money supply went up in exact fashion, then actual wealth is being produced and money maintains as a store of value. Entrepreneurs can then see holes in the market, and capitalists can price goods and services properly. The economy then enters into a virtuous cycle, where money is a feedback mechanism that functions properly as a store of value, and as a signaling mechanism.

When the government creates digital money, and pumps it into the banks (QE), then the excess money is seen as reserves to the system. The banks put the money on the overnight market, where it is not borrowed, thus driving down interest rates. That is why we have low rates, but few takers. The aggregate demand is not there, because we are in a balance sheet recession. This happens after bubble economies pop, as asset prices deflate, and people are underwater on their (housing) loans. Japan circa 80’s; the great depression; and today, are all balance sheet recessions.

If we print debt free money and spend it into the economy like Lincoln did with Greenbacks, then unemployed people are put to work, and actual wealth is produced. In effect, it is like turning up the knob on a boiler, and the output increases. The workers then have cash to pay down their upside loans, and productive infrastructure is left behind.

We have sector inflation as the excess cash in the system flies to safety, or is speculated, or causes a carry trade.

Jared said at April 3, 2011 9:32 PM:

RX,

What school of economics are your ideas from? Do you have any links or books from it that you could give? I'd be interested in learning more about it.

Engineer-Poet said at April 4, 2011 8:11 AM:
What about the role of the Fischer-Tropsch process to get oil from coal? It is my understanding that it becomes economically viable at about $50-60 per barrel.
Were that true, Rentech would be cranking out fuel as fast as they could and getting stock offerings ready to build new plants.  Instead, they're waiting on government loan guarantees for a plant which will produce only 9 million gallons/yr of fuel (about 600 barrels/day).  The Natchez project is still on hold.

These projects need loan guarantees because they are only competitive at very high oil prices, and the US economy is so fuel-inefficient that it goes into recession when those prices are sustained.  A plant which can't pay off its debt goes bankrupt if such conditions last for long.  If the US vehicle fleet averaged 50 MPG instead of 22 MPG, the per-mile cost would let us pay for F-T plants; as long as Chrysler can still sell things with Hemis in them, we're screwed.

RX, you can't print oil.  Dialing up the boiler won't create any of the material inputs to the economy.  Right now our big problem is oil prices, and Art Berman thinks that our cheap natural gas situation is going to blow up around summertime.  We have to get more efficient, and Doug Houseman's prescription (supposed to be somewhere in The Low-Carbon Diet, though I couldn't find anything explicit in the TOC) for putting America's construction people back to work insulating houses is a long-overdue idea.

RX said at April 4, 2011 9:10 AM:

Jared,
For history on money, try www.monetary.org Study actual history first before studing economics. Zarlinga's book is highly recommeded. Dr. Fremery was advanced. Georgist economics are recommended. Its a lot of work to pull the thread and come to a full understanding. To actually understand how our current system works, then MMT theory is the most accurate. Unfortunately, they ill define money as credit, so this leads to some problems. But, by then you will understand where they go wrong. If you are trained in Classical economics, you will have some things to undo. This path may take you a couple of years of effort to arrive at a full understanding of history and economics.

Engineer-Poet,
My point is that a barrel of oil needs to be understood as an economic unit. Each barrel has a certain amount of energy that can be converted to work, and then to economic output. If oil is expensive, that is a hit on productivity. If oil is expensive, then an efficient economy can produce with fewer energy inputs. The U.S. with its current transportation infrastructure depends on cheap oil.

Cost is the crux of Hubert's curve (peak oil), where oil becomes increasingly difficult and hence more expensive to get. Synfuels also are expensive to make, so the question again becomes economic. Humans do have enough energy in the form of coal, remaining gas/oil, nuclear, but it becomes increasingly expensive to acquire energy, barring a step function innovation. My point earlier about hydrogen alluded to a step function innovation.

Dialing up the boiler is an economic example of putting people to work, thus producing more economic output. In a depression, workers are idle due to the lack of money circulating. Workers cannot trade their goods and services efficiently as a modern economy requires money.

sestamibi said at April 4, 2011 12:50 PM:

"Inflation is already going up faster than inflation."

Huh???!??

not anon or anonymous said at April 4, 2011 3:41 PM:

Yes, the price of oil is quite high right now at 108$/bbl for WTI, or 120$/bbl for Brent, and this will put a lid for a while on demand-stimulative policies. However, this is just a one-time shift in prices; there's no reason to expect sustained inflation from the oil market alone. Even the expectations of "peak oil" and future Asian demand, etc. are already embedded in today's price. So we might get away with more monetary easing down the road, depending on how exactly the economy reacts. A fairly safe guess is that the ECB and Fed will stick to their policies and keep inflation rates inside a reasonable range.

Engineer-Poet, why can't the plant raise money on the capital markets and build a cash reserve? If they're worried about lower oil prices down the road, why don't they hedge their output on the futures markets or buy some put options?

The real problem with Fisher-Tropsch is that coal, oil and natgas prices tend to move together. Heavy industry and power plants can switch their energy sources a LOT more easily than a small plant can turn coal to liquids. Thus, Fisher-Tropsch will be a loser, at least until oil gets really scarce.

Engineer-Poet said at April 4, 2011 9:40 PM:

The real problem with F-T is that it's capital-intensive, not easy on the O&M either, and around 45% efficient if you do things pretty well.  You need a substantial markup to pay off the capital cost, so the F-T plant is always going to be the marginal producer.  If the inputs were the major cost (like gas-fired electric generators) this wouldn't be so much of a problem, but construction bonds have to be paid whether prices are down or up and such a characteristic is going to force them to pay a risk premium.  This is not a recipe for a viable project.

this is just a one-time shift in prices; there's no reason to expect sustained inflation from the oil market alone.
It's not a one-time shift.  Oil producers won't let their returns be inflated away, and they can't inflate away the cost of the energy and equipment required to maintain their fields.  The reduced EROEI of oil means, ceteris paribus, a permanent and increasing drain of capital to oil producers from other consumption and investment.

The only ways around this are efficiency and substitution.  Had we stayed on the road to PNGV, we would have 60 MPG cars with turbo DISI engines even if NOx regulations wouldn't let us have the adiabatic diesels.  Instead, the US auto industry is still mired in a situation where guzzlers are one of very few profit centers; my next-door neighbor was complaining to me the other day about the cost of feeding the Hemi in her Aspen.  Unless we get sensible about this real fast, we're going to be bled white.

RX said at April 5, 2011 9:45 AM:

The Bank of Japan analyzed the commodity price run-up. Speculative inflows and financialization of markets is not true inflation, it is money systems being gamed for profit and it targets sectors. We all pay for wall street profits in the end. Financial Pariah Capitalism undermines the good name of market capitalism. RX

“While the strong increase in commodity prices has been driven by global economic growth propelled by emerging economies, speculative investment flows into commodity markets have amplified the intensity of the price surge. The dynamics of global commodity prices has been changing as well, in accordance with the growing presence of financial investors in commodity markets. The entry of new financial investors has paved the way for the “financialization of commodities”. Consequently, global commodity markets have become more sensitive to portfolio rebalancing by financial investors, which has made commodity markets more correlated with other asset markets, including major equity markets. Furthermore, globally accommodative monetary conditions (Quantitative Easing) have played an important role in the surge in commodity prices, both by stimulating physical demand for commodities and driving more investment flows into financialized commodity markets.” BOJ

not anon or anonymous said at April 5, 2011 11:36 AM:

RX, "speculative inflows" is code for "folks are buying this stuff as an investment because they think it will be even costlier in the future". If they are right, they get to make a profit and future price rises are smoothed over. If they are wrong, say because there is a bubble, then we get a temporary disruption in prices and the speculators lose. Given that this board is quite concerned with future supply constraints due to peak oil, competing demand from Asia etc., these speculative flows should be further enabled, not curtailed.

Jeff Maylor said at April 8, 2011 10:01 PM:

So it sounds like the Fischer-Tropsch process is not viable as long as there is doubt about the future price of oil, specifically a fear that it could come down below $50-60 a barrel. But if and when peak oil really occurs and oil is permanently (one assumes) above $80-100 a barrel, then I still don't see what it won't be viable at that point. It just seems like this puts a floor below how bad things can really get. If and when energy prices truly skyrocket, there are methods available to deal with it.

Randall Parker said at April 9, 2011 6:28 PM:

Jeff Maylor,

I think compressed natural gas cars make much more sense than Fischer-Tropsch Coal-to-Liquid.

Engineer-Poet said at April 11, 2011 4:37 AM:

CNG is certainly simpler and cheaper than CTL.  The major barrier to mass CNG conversions is EPA rules requiring prohibitively expensive bonding and certification requirements for the work.

Steve said at April 11, 2011 6:38 AM:

Jeff, you mention the Fischer Tropsch method of making gasoline from coal. It's actually natural gas where the process can be used on a scale to make all of the fuel we use. We have about 130 to 150 years worth of natural gas in the U.S. and for some weird reason it is the Saudis and other OPEC countries who are building huge plants to convert nat gas to gasoliine. http://www.theinfomine.com/2010/06/04/is-gas-to-liquids-better-than-cng-for-fuel/
It's a shame that politics is ruining our chances for clean fuel. What nation in its right mind would use food (corn) to make fuel to burn, at a net energy loss of 1.5 to 1?

Engineer-Poet said at April 11, 2011 8:03 AM:

F-T synthesis starts from a syngas of CO and H2, not natural gas.  Syngas can be made from just about anything that contains carbon.

GTL is around 45% efficient.  It is insane to turn natural gas into gasoline just to run cars.  It is marginally sensible to gasify coal in polygeneration plants which make electricity during peak hours and methanol at night.


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