Inflation

[againsthegrain]

the media are really starting to ramp up the inflation fear, well news.com.au is not media however it is viewed by the general public so alot of people are getting scared?

Fears as ‘hyperinflation’ strikes

Former US President Ronald Reagan once said, “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.”

www.news.com.au

 

[moXJO]

There's a huge shortage of goods and getting services is a 6 month waiting list. Even computers are hard to get and we are coming up to Christmas which means it's all going to get worse.

 

[mullokintyre]

From Todays OZ

The governor conceded on Tuesday there was an argument that the RBA should have stayed in the market to achieve its stated objective.

“We had this target and you could argue we should keep on buying the bonds until we had formally dropped it, but there were a couple of considerations in not doing that,” he said.

“The first was that with yields having moved so much, and the swap curve and all other rates, it would have been difficult to achieve a yield of 10 basis point; in fact, I don’t think it would have been achievable.

“We would have been buying all the freely floating stock and not achieving anything, so that didn’t seem a sensible thing to do.”

The other consideration related to the RBA’s all-important communication function.

“If we had done that, you would have rightly been asking today why we continued buying this bond, and it was ultimately unsuccessful, in the full knowledge that the distribution of risk was shifting away to make the target unsustainable,” Dr Lowe said.

“So I used the discretion that I have as governor to stand out of the market.

“We had stood out of the market on previous occasions, not as dramatically as this one, but I thought that was the best course of action.”

Dr Lowe was asked if he would consider reintroducing yield curve control if the nation faced a similar crisis of the magnitude of Covid-19.

He responded that the RBA would have to consider the lessons learnt, but thought on the whole it was unlikely.

“It was very much a policy for a specific period in our history,” he said.

“I look back on the explanation I gave in March last year when we introduced that target and part of it was that we wanted to directly target a yield curve rather than buying government securities.

“I thought that was the right thing to do at the time, but as time passed, other central banks were doing quantitative easing and I thought we were paying a cost in financial markets for not doing that as well.

“So we went back and did the QE that we elected not to do in March.”

As a central banker, though, you never want to rule anything out completely, particularly when you can’t possibly guess the origin of the next crisis.

“Who knows?” Dr Lowe said.

“In January 2020 I didn’t think we’d be doing it a couple of months later, so stuff can change. But it’s pretty unlikely.”

Looks like mr Lowe has conceded that the market always wins in the end.
The overnight market reaction to yesterdays non announcement from the RBA was to dump the AUD, because they saw the RBA response as 'too dovish".
Maybe that was Lowes idea all along. keep the AUD down, keep the Oz exports attractive to other countries, and import some more imflation so as to make the value of debt decrease.
Mick

 

[mullokintyre]

CBA has become the latest cab off the ranks in the increase the interest rate race.
From Todays OZ

Commonwealth Bank has no advertised home loan rates under 2 per cent for the first time in a year after it hiked its fixed rates for the second time in three weeks.

On Friday morning CBA raised its one to five year fixed rates by between 0.1 and 0.5 per cent.

It means CBA's last remaining sub 2 per cent fixed rate – its one year option – has lifted 35 basis points to 2.34 per cent.

Australia’s largest bank has followed Westpac, which on Thursday hiked its fixed rates for the second time in two weeks.

It appears the banks are racing each other to raise fixed rates.

The move by the banks is pointing the way for the home lending market, after the Reserve Bank of Australia was forced to back down on its attempts to keep short-term debt costs low.

It comes after a surge in bond yields after blowout CPI data last week, which led the RBA to walk away from its short-term bond yield target.

In the last month, 25 lenders have lifted five-year fixed rates.

RateCity research director Sally Tindall said it was likely the Reserve Bank of Australia’s shift in monetary policy this week spurred the move from Westpac with more banks to follow.

The banks obviously expect official rates to go higher in the near future.
Mick

 

[mullokintyre]

Well the proverbial hit the fan overnight when the latest inflation figures came out showing annual US inflation has climbed to 6.2%.
And once again the expert forecasters were way off the the mark.
From Kitco

Wednesday’s U.S. consumer price index for October came in hot, at up 0.9% and up 6.2%, year-on-year. The CPI was expected to come in at up 0.6% from September and up 5.9%, year-on-year. The October numbers are the highest U.S. CPI readings in over 30 years. Tuesday’s U.S. producer price index showed a rise of 8.6%, year-on-year.
Meantime, China’s producer price index on Wednesday was reported up 13.5% in October, year-on-year, and up from a 10.7% rise in September. That is the fastest factory gate price rise on recent record. Extreme weather and coal shortages are being reflected in China’s rising PPI.
Just recently, several Federal Reserve officials seemingly grudgingly are coming around to the notion that rising inflationary pressures are something more than just “transitory.”

I was listening to the ABC yesterday and the presenter was interviewing a representative from the hospitality industry. The discussion was about a new phenomenon where hospitality premises are starting to close down again, not because of Covid, but because they cannot get skilled workers. The spokesperson was bemoaning the fact that without the backpackers, foreign students, and the influx of skilled temporary or skilled migrants, the employees just could not find the staff.
The cheap labor will start coming back in dribs and drabs over time (unless of course there is another covid shutdown - always on the cards).
So the employees are going to have to start improving the wages and conditions on offer to potential employees.
Coupled with the scarcity of truck drivers, increases in fuel, transport costs are going to get more expensive, which will flow through to everything we buy or shift.
As is often the case, the authorities will not know or admit that inflation is already away before they clumsily try to do something about it.
Mick

 

[mullokintyre]

The headof the RBA is still insisting that there will be no rate rises in 2022.
From Todays OZ

Reserve Bank governor Philip Lowe says Australia will not be sucked into a “perfect storm” of global inflationary pressures, as minutes from the last RBA board meeting revealed that a rate rise in 2024 remained the “central scenario”.
Amid fears rates could rise as soon as next year, Dr Lowe repeated that “the latest data and forecasts do not warrant an increase in the cash rate in 2022”.

“The economy and inflation would have to turn out very differently from our central scenario for the board to consider an increase in interest

In a speech to the Australian Business Economists, Dr Lowe listed the reasons why fears of consumer price contagion from overseas was overstated.

These included what he saw as Covid only temporary impact on global supply chains, and that Australia’s $89bn JobKeeper program had minimised the labour market shock being felt overseas, and so kept wages growth in check despite reports of worker shortages.

Dr Lowe said “inflation in many countries rose as increased demand for goods quickly ran up against a supply side that was not flexible enough”.
“In some countries, developments in energy markets, partly due to adverse weather events, have added to the upward pressure in inflation. Although there is some uncertainty, it is likely that inflation from these sources will moderate over the next 18 months as demand rebalances towards services and the supply of goods adjusts,” he said.

Dr Lowe said that most central banks around the world forecast inflation pressures will ease sharply in 2022, in part due to some actual or expected policy tightening.

“This is consistent with the view that the current increase in inflation is only transitory and that a period of contractionary monetary policy will not be required to return inflation to target,” he said.

Dr Lowe said the labour market was “critical” to whether the Covid-related price pressures became entrenched in sustainably higher inflation.

“It is unusual to have persistently higher inflation without persistently higher wages growth (unless there is a shift lower in labour productivity growth),” he said.

“The two generally go together. There have been historical exceptions to this, and other factors that affect firms’ costs and mark-ups can have persistent effects. But at the current juncture, the labour market is the key.”

Wish i could share his optimism that inflation is transitonary.
The problem is , if he has got it wrong, the reaction will be late and over the top.
Overshooting and undershooting seems to be the constant theme.
he and his cohorts need to get out more and see what the less well off are faced with.
Mick

 

[Smurf1976]

he and his cohorts need to get out more and see what the less well off are faced with.

Without criticising anyone personally, I think a problem with all economic actions by governments and central banks is that those making the decisions often aren't seeing it first hand.

Anyone can look at data but seeing it first hand often gives a different perspective.

The kind of inflation I'm seeing is one that's going to hit the poor harder than anyone else. For example a local supermarket hasn't changed the full price of bakery items but they've slashed the end of day discount clearing out unsold items. Etc. I'm seeing a lot of that sort of thing where the full retail price of a brand name product hasn't changed but the cheapest available, either a cheaper brand or a discounted price on special, has increased significantly. That's going to hit those who intentionally buy whatever's on special to save money but won't really show up in CPI statistics.

 

[mullokintyre]

I work as a volunteer with a local well known charity trying to help people in financial difficulty.
I spend a lot of time trying to explain very simple basic economic education to people who have never had it.
To be harshly frank, a lot of the time people who are at the bottom of the economic heap get there because of poor life choices.
So much of time is spent trying to get them to change certain aspects of their life.
Some of them seem bleedin obvious .
Things like having a budget for their weekly and monthly expenses.
I used to go shopping with one guy just to show him how he could buy the ingredients for a meal at a quarter of the price for a finished meal.
Sometimes its successful, and some clients manage to get out of a deep hole.
But they are in the minority.
There are some people who just cannot be helped.
They will make the same obviously financial bad decisions over and over again.
But the one thing they have in common is that they are acutely affected by inflation.
It matters little whether inflation is transitionary to them.
Some of the things that are included in the CPI that have reduced the CPI have very little impact on them.
Falls in new car prices, electronic devices, travel etc are items that will rarely if ever be on their shopping list.
If they do own a car, it will most likely be an older inefficient ICE bomb that rarely gets any maintenance.
Unlikely to have insurance of any kind, and just as likely to be unregistered.
Fuel prices are critical to them.
The costs of gas and electricity for heating cooling or cooking will take up a good chunk of their income.
They have no chance of owning shares, most likely renting, do not hold education as a vitally important function in their kids lives.
In other words, they are behind the eight ball all the time.
They may vote, but there is no guarantee.
Mick

 

[mullokintyre]

From Todays Oz

Westpac has lifted its fixed rates for the third time in four weeks as the major banks retreat from record low lending rates eagerly snapped up by borrowers.
The big bank moved to hike its owner-occupier and investor rates, leaving no loan package on offer for less than 2.24 per cent.

Westpac’s three-year fixed rate loan saw the largest lift in borrowing costs, up 0.3 per cent.
The increase, while small, pushes the potential monthly repayments on a $500,000 loan up by $78 per month.

The changes affect both owner-occupier and investor rates across the Westpac Group including St George, Bank of Melbourne and BankSA.

Westpac’s rush illustrates the rapid pace at which banks are rethinking their lending rates as they look to backstop margins in the face of offshore funding cost hikes.

Westpac joins a throng of other lenders, with 16 banks pushing up fixed rates at least twice in the last month.

Westpac first increased two- to five-year rates by 0.10 per cent on October 19, before upping three- to five-year rates by between 0.10 per cent to 0.21 per cent on November 4.

RateCity research director Sally Tindall said banks had “hit the accelerator on fixed rates”, with many moving to raise rates faster and more often.

“At first, the fixed rate hikes were isolated to longer-term rates, but now banks are lifting across the board at an extraordinary pace,” she said.

“These fixed rate hikes are more than speculation the cash rate could rise earlier than expected. The cost of wholesale funding is increasing, and the banks have decided it’s not sustainable to keep fixed rates at ultra-low levels.”

Ms Tindall said although the cash rate had not yet moved, the cost of wholesale funding was rising and banks were being forced to respond.

“The cost of wholesale funding is increasing, and the banks have decided it’s not sustainable to keep fixed rates at ultra-low levels,” she said.
The hike comes as the Reserve Bank of Australia on Tuesday said a cash rate rise in 2024 remained its “central scenario”.

It is becoming more and more obvious that the interest rate momentum has left the RBA behind.
I very much doubt that WBC is the only bank that is having trouble accessing depositors funds to lend out.
All I am waiting for now is the ba$tard$ to start increasing deposit rates.
Mick

 

[againsthegrain]

From Todays Oz




It is becoming more and more obvious that the interest rate momentum has left the RBA behind.
I very much doubt that WBC is the only bank that is having trouble accessing depositors funds to lend out.
All I am waiting for now is the ba$tard$ to start increasing deposit rates.
Mick

That is a good start, plenty fat left to carve

 

[mullokintyre]

Carghills is one of the larger food conglomerates on earth.
Its CEO, Dave Maclenna, has recently changed his mind about the transitory nature of inflation.
In an interview with Bloombergs
he said

I thought inflation in ags and food was transitory. I feel less so now because of continued shortages in labor markets," "That's one of the inputs to the supply chain that we're watching most carefully."

The global food index may break into territory not seen this decade.




I guess for the wealthy elites, this is not big deal, as long as the supply is there.
if you can pay $5,000 for a gucci handab or $10,000 for a pure Alpaca wool coat, having your food prices double or even triple is of no great concern.
For those at the bottom it is of great concern.
Mick

 

[againsthegrain]

Carghills is one of the larger food conglomerates on earth.
Its CEO, Dave Maclenna, has recently changed his mind about the transitory nature of inflation.
In an interview with Bloombergs
he said

The global food index may break into territory not seen this decade.


View attachment 133196

I guess for the wealthy elites, this is not big deal, as long as the supply is there.
if you can pay $5,000 for a gucci handab or $10,000 for a pure Alpaca wool coat, having your food prices double or even triple is of no great concern.
For those at the bottom it is of great concern.
Mick

And having a whopping 50c a hr increase for min wage will make it all ok

 

[over9k]

But you have to remember how these things are weighted in the (fudged) official CPI etc numbers. Think about how much energy is a primary input into even food production and energy has had a massive supply crunch. The good news is that oil wells etc are coming back online (this doesn't take 5 minutes) and just talk of releasing strategic reserves has dumped the oil price and thus everything else dramatically:




You have to remember that prices are pretty sticky/slow to react in this market because you can't just reopen an oil well and ship oil across the planet in five minutes, this is a process that takes weeks. Oil companies also obviously want to know there's going to be a market for their stuff before they ship it so they need some confidence in the oil price before they pull the metaphorical trigger.


Point is, this is far more a supply side issue than an interest rate one. Interest rates effect asset prices (p/e), commodity etc prices, not so much.

 

[Smurf1976]

Think about how much energy is a primary input into even food production

Something I'll add for those not aware is that ammonium is produced from natural gas.

That's not simply using gas to run the factory as an energy source but gas is the actual raw material feedstock from which ammonium is made. That's not the only way to make it but it's the major commercial process in current use.

So there's a very direct link there between natural gas prices and the cost of making ammonium fertilizer which is itself an agricultural input.

In the opposite direction, various agricultural crops can be processed to produce ethanol which can be (actually is) used as a blending component in petrol. Any rise in the price of oil thus increases the price point up to which it's profitable to add ethanol, or to add more than would otherwise be added, which then diverts some food crops into producing that ethanol.

So there's two very direct linkages between energy commodities and human food without even mentioning the fuel used in transport, farm machinery, food processing plants and so on.

 

[qldfrog]

Something I'll add for those not aware is that ammonium is produced from natural gas.

That's not simply using gas to run the factory as an energy source but gas is the actual raw material feedstock from which ammonium is made. That's not the only way to make it but it's the major commercial process in current use.

So there's a very direct link there between natural gas prices and the cost of making ammonium fertilizer which is itself an agricultural input.

In the opposite direction, various agricultural crops can be processed to produce ethanol which can be (actually is) used as a blending component in petrol. Any rise in the price of oil thus increases the price point up to which it's profitable to add ethanol, or to add more than would otherwise be added, which then diverts some food crops into producing that ethanol.

So there's two very direct linkages between energy commodities and human food without even mentioning the fuel used in transport, farm machinery, food processing plants and so on.

And i would add that any vegetable oil can be used in diesel engine nearly as is.
So these tractors, dozers and hauling trucks in mine can become carbon neutral tomorrow if we decide to let the (third?) World starve.
An interesting point is that ethanol mixed in petrol at the pump, when coming from corn and cereal: Europe and USA, is actually a net loss in term of fossil fuel
More black oil is consumed then saved by switching to E10 in these countries.
When using agricultural wastes, it is a positive and so different.
So E10 usually a political move aka agricultural subsidies in hiding.
Vegetable oil as fuel on the other end makes sense, but is so far only cheaper by the absence of taxes.
So people mix vegetable oil with diesel at the retail level but not at the official pump stations.
I like following these cars smelling like cheap fries.

 

[over9k]

Something I'll add for those not aware is that ammonium is produced from natural gas.

That's not simply using gas to run the factory as an energy source but gas is the actual raw material feedstock from which ammonium is made. That's not the only way to make it but it's the major commercial process in current use.

So there's a very direct link there between natural gas prices and the cost of making ammonium fertilizer which is itself an agricultural input.

In the opposite direction, various agricultural crops can be processed to produce ethanol which can be (actually is) used as a blending component in petrol. Any rise in the price of oil thus increases the price point up to which it's profitable to add ethanol, or to add more than would otherwise be added, which then diverts some food crops into producing that ethanol.

So there's two very direct linkages between energy commodities and human food without even mentioning the fuel used in transport, farm machinery, food processing plants and so on.

Yep, the germans had this problem in the war as all their oil was being sent eastwards to fuel their tanks etc and they ended up with serious food supply problems.

Fertiliser costs.

 

[mullokintyre]

In the opposite direction, various agricultural crops can be processed to produce ethanol which can be (actually is) used as a blending component in petrol. Any rise in the price of oil thus increases the price point up to which it's profitable to add ethanol, or to add more than would otherwise be added, which then diverts some food crops into producing that ethanol.

So there's two very direct linkages between energy commodities and human food without even mentioning the fuel used in transport, farm machinery, food processing plants and so on.

There have been a number of periods in North Americas most recent history when the demand for ethanol has forced up prices of corn based foods. See HERE, Here , and HERE .
Corn and maize based foods coincidently make up a staple part of lower socio economic groups, so they are disproportionally affected.
hence it is unlikely to enter the consciousness of the MSM.
It also distorts the mix of ag production as corn then increases as a percentage of ag crops as seen Here.
The law of unintended consequences.
Mick

 

[mullokintyre]

Inflation in the EU has hit a record high in the September quarter.
From The Australian

Consumer-price inflation in the eurozone likely hit a record high in November, but many economists think that might mark a peak for now, and therefore don’t expect the European Central Bank to raise its key interest rate next year.

And once again, the economic experts got it wrong.

As in the US, consumer prices in the eurozone have risen faster over recent months than most economists and policy makers had expected. The data have raised questions for investors, businesses and households about the credibility of central bank assertions that this period of high inflation is likely to prove transitory.

but they are doubling down, and suggesting that inflationary pressure will ease, and like American experts, suggest its only Transitonary".

Many private economists forecast that inflation in the eurozone will decline significantly at the start of the year, echoing the ECB’s view that the period of rapid price rises will be short-lived. The firms sharing this view include UBS, Morgan Stanley, BNP Paribas and Oxford Economics.
The European Union’s statistics agency is expected to estimate Tuesday that prices were between 4.3 per cent and 4.5 per cent higher in November than a year earlier.

That would mark the fastest annual rise in prices since records began in 1997. During those 24 years, the inflation rate has only exceeded 4 per cent in two months, the first of those being July 2008, and the second October of this year.

The ECB is scheduled to set out in December its expectations for 2022. But policy makers are unlikely to announce any moves to counter the inflation surge, other than confirming that a bond-buying program launched to soften the economic impact of the pandemic will end in March.

I doubt that the EU experts have any more idea of future inflation than their US counterparts.
Mick

 

[mullokintyre]

From ABC NEWS

The new EBA announced includes a wage increase between 9.25 per cent and 9.75 per cent subject to Consumer Price Index (CPI) over three years, as well as an additional 2 per cent increase in superannuation during a three-year period, reaching 13 per cent in 2023.

The agreement also includes a commitment from both parties to review the agreed wage increase at the two-year mark against the Consumer Price Index, capped at 3.5 per cent.

I would not mind betting that this will cause two things'
1. A flow on effect to first of all, other players in the delivery industry, and then spread to other inductries as the unions seek more fopr its members.
2.The extra costs in transport will increase costs for everyone and everything.

Yesterday I looked at ordering about $900 bucks worth of parts for my "experimental" EV sportscar from the Gold Coast.
Freight cost was $900. my purchase doubled in price just due to freight.
Inflation? What inflation?
Mick

 

[MovingAverage]

Without criticising anyone personally, I think a problem with all economic actions by governments and central banks is that those making the decisions often aren't seeing it first hand.

Yup, and they're always looking in the rearview mirror.

I say this somewhat flippantly, but I use my dear old Mum and Dad as a "leading indicator of inflation". They're retired and on fixed income so very sensitive to price increases in everyday items. My dad has always been a grumpy old man and so complains about everything, but my mum is far more considered. For the past two months she's been complaining about the significant increase in her everyday shopping: the recent increases in bread from bakers delight, the exorbitant price of Brussel sprouts in Coles and that petrol is not far off $2 a litre. Their cost of everyday necessities has increased dramatically over the past few months and looks set to continue to increase. If that ain't inflation not sure what is.