Best of the Week
Most Popular
1. Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - P_Radomski_CFA
2.Fed Balance Sheet QE4EVER - Stock Market Trend Forecast Analysis - Nadeem_Walayat
3.UK House Prices, Immigration, and Population Growth Mega Trend Forecast - Part1 - Nadeem_Walayat
4.Gold and Silver Precious Metals Pot Pourri - Rambus_Chartology
5.The Exponential Stocks Bull Market - Nadeem_Walayat
6.Yield Curve Inversion and the Stock Market 2019 - Nadeem_Walayat
7.America's 30 Blocks of Holes - James_Quinn
8.US Presidential Cycle and Stock Market Trend 2019 - Nadeem_Walayat
9.Dear Stocks Bull Market: Happy 10 Year Anniversary! - Troy_Bombardia
10.Britain's Demographic Time Bomb Has Gone Off! - Nadeem_Walayat
Last 7 days
Stock Market Due for 9-10% Pull Back? - 25th April 19
Dow Transportation Stocks Sector Is Testing Resistance - 25th April 19
INSOMNIA i64 UK Best Games Festival Vlog of What it's Like to Attend - 2019 - 25th April 19
In Just 45 Mins., Learn to Spot New Opportunities in ANY Market for FREE! - 25th April 19
If This Pattern Holds True, the US Economy Could Face the Worst Stagnation in History - 25th April 19
8 Reasons Why Investment in Education Always Pays Off - 25th April 19
Want To Earn A Safe 5% In Fixed Income? Buy Preferred Stocks - 24th April 19
Can Gold Price Rise Without a Rate Cut?  - 24th April 19
Silver’s Next Big Move - 24th April 19
How Can a College Student Invest Wisely? - 24th April 19
Prepare For Unknown Stock Market Price Action As New Highs Are Reached - 23rd April 19
Silver Plays a Small but Vital Role in Every Portfolio - 23rd April 19
Forecasting 2020s : Two Recessions, Higher Taxes, and Japan-Like Flat Markets - 23rd April 19
Gold and Silver Give Traders Another Buying Opportunity - 23rd April 19
Stock Market Pause Should Extend - 21st April 19
Why Gold Has Been the Second Best Asset Class for the Last 20 Years - 21st April 19
Could Taxing the Rich Solve Income Inequality? - 21st April 19
Stock Market Euphoria Stunts Gold - 20th April 19
Is Political Partisanship Killing America? - 20th April 19
Trump - They Were All Lying - 20th April 19
The Global Economy Looks Disturbingly Like Japan Before Its “Lost Decade” - 19th April 19
Growing Bird of Paradise Strelitzia Plants, Pruning and Flower Guide Over 4 Years - 19th April 19
S&P 500’s Downward Reversal or Just Profit-Taking Action? - 18th April 19
US Stock Markets Setting Up For Increased Volatility - 18th April 19
Intel Corporation (INTC) Bullish Structure Favors More Upside - 18th April 19
Low New Zealand Inflation Rate Increases Chance of a Rate Cut - 18th April 19

Market Oracle FREE Newsletter

Top 10 AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Hidden U.S. Inflation, U.S. Consumers Adjust Spending Habits Amid Soaring Prices

Economics / Inflation Mar 25, 2011 - 12:40 PM GMT

By: Money_Morning

Economics

Best Financial Markets Analysis ArticleKerri Shannon writes: U.S. consumers have watched food and fuel prices eat away at their household budgets, and now those price hikes are spreading to other products - with the worst yet to come.

New York Federal Reserve Bank President William Dudley recently got a taste of public frustration with higher prices. He spoke to a crowd in Queens, New York on March 11 to tackle a mountain of food inflation questions. Dudley told the audience that while some prices are rising, other products are cheaper - like the Apple Inc.'s (Nasdaq: AAPL) latest iPad.


"Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful," said Dudley. "You have to look at the prices of all things."

Dudley's comparison prompted one audience member to reply, "I can't eat an iPad."

Another asked Dudley when the last time was that he went grocery shopping.

Indeed, an affordable iPad will likely remain low on consumers' list of concerns. They are too busy deciding how to pay for gasoline and groceries.

Companies Pass On the Price Pain
The consumer price index (CPI) in February showed food-at-home prices rose 2.8% in the past year, and gasoline costs climbed a whopping 19.2%. Prices for all items rose 2.1%, but many experts consider real inflation closer to 8% -- or higher.

"My research suggests inflation is really running between 9% and 12%, which is more commensurate with what we all feel in our wallets every day," said Money Morning Chief Investment Strategist Keith Fitz-Gerald.

The producer price index (PPI), which tracks the price of goods before they reach consumers, also rose last month. U.S. wholesale prices were up 1.6% in February, doubling their increase in January and soaring past economists' estimates of 0.7%.

Higher wholesale prices are not always passed on to consumers. Retailers sometimes try to absorb the costs to keep shoppers buying their products. But with wholesale prices up 5.6% in the past year, and consumer prices only up 2.1%, businesses are running out of ways to avoid further price hikes. That means consumers have more price pain ahead.

"Price increases take some time to come through," John Ryding, chief economist with RDQ Economics, told CNNMoney.com. "But the idea that we'll dodge the prices this time around doesn't make any sense."

Wholesale food prices last month rose by 3.9%, the most since November 1974, and are up 7.3% in the past 12 months. Food prices are at their highest levels since the United Nations began tracking them in 1990.

Food prices hit their previous high in June 2008, but economists expect this current surge to be more permanent.

"The big difference today relative to the 2008 commodity rise is that underlying demand is significantly more robust. This means that price gains are more likely to stick," Joseph LaVorgna, chief U.S. economist for Deutsche Bank AG (NYSE: DB), wrote in a note.

Companies have seen shrinking profit margins as they pair record high commodity prices with higher shipping costs. They either have to find a way to balance the extra costs, or raise prices and risk losing cost-conscious consumers to other products. Businesses may be hesitant to raise prices while consumers are bargain hunting, but many are left with few other options.

"The possibility that it will be passed to the consumer is starting to grow," said Eugenio Alemán, senior economist with Wells Fargo Securities. "The U.S. economy is recovering and there is more consumption, leading firms to believe they can raise prices."

The price jumps already have started in many popular food chains:

Wendy's restaurants, part of Wendy's Arby's Group Inc. (NYSE: WEN), is only putting tomatoes on sandwiches per customer request. Starbucks Corp. (Nasdaq: SBUX) and Dunkin' Donuts have raised coffee prices as bean prices continue to surge. And Kellogg Company (NYSE: K) said it expects higher grain costs to push cereal prices up 3% to 4% this year.

Meanwhile, foodmaker General Mills Inc. (NYSE: GIS) said it expects inflation for food ingredients to climb higher this year than the 4% to 5% it previously forecast.

Analysts have long considered General Mills to be among the industry's best at handling higher commodity costs, but even that company's brass has said its shoppers won't be immune to the price squeeze.

"We need some list pricing (increases) and I think that our retail partners understand that," General Mills Chief Executive Officer Ken Powell said on a conference call.

Now consumers are starting to see more price hikes beyond the grocery store and the gas pump. February's CPI showed price gains in new vehicles, entertainment, medical care and airline fares.

Hanesbrands Inc. (NYSE: HBI) raised prices on many products last month and could do so again this summer. Cotton prices have hit record highs this year.

Appliance maker Whirlpool Corp. (NYSE: WHR) could push prices higher next month due to climbing steel costs.

Kimberly-Clark Corp. (NYSE: KMB) announced this week it will raise prices this summer in North America due to higher raw material and energy costs. U.S. consumers will see prices for products like Huggies baby wipes and diapers, Pull-Ups training pants and Goodnites youth pants go up 3% to 7%. Prices of Cottonelle and Scott bathroom tissue will also rise about 7%.

While many retailers admit that prices will rise in coming months, their desire to keep customers means steep bargains for consumers with the extra cash.

Kohl's Corp. (NYSE: KSS) plans to roll out more discount programs, like special discounts for shoppers over age 60.

"Apparel inflation is clearly real, but we believe we have had the time, the tools and the processes to work through it effectively and have a competitive advantage for both us and our consumer," said Kevin Mansell, chief executive of Kohl's.

Consumers Ready for Brewing Inflation Storm
U.S. consumers handle rising prices through a variety of tactics, such as stockpiling, sales hunting, or paring down to the bare minimum.

A survey released Monday by America's Research Group (ARG) showed about 75% of Americans were shopping less due to higher gas prices. Consumers are also cutting coupons and searching for bargains more than in prior months.

"What we are going to see happen is that consumers will try and cut back on all discretionary purchases, until finally they are going to have to make a decision at some point: what do I really have to give up?" said ARG President Britt Beemer.

Economists at Morgan Stanley (NYSE: MS) and Deutsche Bank AG (NYSE: DB) cut consumer-spending forecasts based on data showing U.S. households are using extra cash to boost savings to prepare for higher food and fuel prices, a trend likely to continue through 2011.

"If gasoline prices continue to rise, this would mean less disposable income for other retail sectors," Michael McNamara, vice-president of research and analysis for MasterCard Advisors SpendingPulse, told The Financial Times. "If consumers cut back on driving, this could put pressure on categories such as the travel industry and some segments of the restaurant sector, while benefiting online retail."

Consumers this year have already turned to bulk stores to deal with higher prices. Costco Wholesale Corp. (Nasdaq: COST) sales rose 11% in the second quarter to $20.45 billion. BJ's Wholesale Club reported a 7.4% sales increase to $2.9 billion with same store sales up 3.8%.

BJ's Chief Executive Officer Laura Sen said shopper traffic is up, especially at store locations with gas pumps.

"We also see that we've got some improved performance in member sign-ups versus a year ago, in clubs that have gas," Sen told The FT. "We see this as one of our best marketing tools, especially in a rising-price environment."

U.S. consumers are likely to hit discount chains more to trim shopping budgets. This should push some heated competition among retailers.

"Wal-Mart has a new enemy called the dollar stores," said Beemer.

Family Dollar Stores Inc. (NYSE: FDO) saw second quarter earnings rise 8.3% to $2.09 billion. Comparable-store sales increased 5.1%.

"Sales (at discount retailers) are fairly steady and are selling a lot of consumable products and a lot of necessities," FBR Focus Fund portfolio manager Brian Macauley told Reuters.

Source : http://moneymorning.com/2011/03/...

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules