The Inflation Monster Cometh! »
Wednesday, March 22, 2006 | Dylan JovineRating:
"Wholesale Inflation Slips 1.4 Pct. in Feb. -- A huge drop in energy costs helped push prices at the wholesale level down last month by the largest amount in nearly three years. But with the cost of gasoline rising again, the reprieve could be short-lived."
I'm not going to tell you which reputable news source is responsible for this ridiculous headline, but I will tell you that many financial news sources were singing the same tune.
But something told me that I should probably read the report myself before jumping for joy. So I decided to head over to Bureau of Labor Statistics to check out the PPI for myself.
Here's what I learned:
The Headline - "Wholesale Prices Drop Significantly and Unexpectedly"
Behind the Headline - The biggest drop in prices was seen in energy commodities: gasoline, which fell 11 percent, and residential natural gas, which fell 4.1 percent. Large decreases also came from a range of food products from fresh vegetables, down 27.1 percent; eggs, down 23.1 percent; to processed young chickens, down 8.2 percent.
The Headline - "Excluding Food and Energy, the Core Index was up 0.3 Percent."
Behind the Headline - The February increase comes on top of a 0.4 percent rise in January, and a 0.1 percent increase in December.
The Bottom Line
Yes, it is true that wholesale prices dropped. But anybody who thought it was "unexpected" is out of their mind. We all knew that energy prices have been declining big time - just take a look at the price of oil. And with this darn bird/chicken flu thing running around, who's ordering eggs with their steak anymore?
So that leaves us with the "core index" - the index that leaves out energy and food prices each month, due to their volatile price swings.
The reason this index is so important is because it measures what companies are able to sell their products to other companies for. For example, if you owned a construction company it would show what you paid for that new tractor. Or if you owned a retailer, it would show what you paid to buy magazines for that month.
Below are a few pricing examples taken from the recent report:
- Drug prices rose a stunning 0.7 percent Magazine subscriptions were up 2.3 percent;
- Jewelry was up 1.5 percent.
- Industrial and commercial equipment like ships, was up 1.2 percent, and truck trailers, up 1 percent.
1. If your company pays more for the same goods, it's almost like getting taxed. If you're getting taxed that means you'll make less profits.
2. Instead of eating the profits, your company will try as hard as it can to pass that cost onto its customers, the consumer. If that happens, consumers can buy less for every dollar they have.
The Bottom Line II
Inflation, my dear friend, is rearing its ugly head. The Fed will likely continue to raise interest rates to put a damper on these price increases.
The Bottom Line III
The reason inflation is so nasty is because it erodes profits.
You see, the corporate world is divided into two types of companies: those that can raise prices with or above inflation, and those that can't.
Those that can raise prices at or above the inflation rate do fine (relatively speaking). Those that cannot raise prices above the inflation rate don't.
What you want to do is take a long, hard look at the companies in your portfolio and begin to eliminate those that don't have the ability to raise prices in an inflationary environment. Pay particular attention to the ones carrying lots of debt … they're the ones to take it on the chin first and hardest.
Until Tomorrow,
(Please let us know what you think about Dylan Jovine's article.)
Rate his article here »
Rate his article here »
Dylan Jovine
Chief Investment Officer
The Tycoon Report
