Bond yields jumped today over fears of a wage-induced bout of inflation. Meanwhile, price wars have broken out.
- Costco: "Price is at the top of our list," Costco chief financial officer Richard Galanti told investors on Friday. "When prices are going down...we want to be the first to go down."
- Walmart: "Price still matters. There are a lot of Americans that are counting every penny and every dime," CEO Doug McMillon said at Walmart's shareholder meeting last week. Walmart's prices fell close to 4% from February through April. Cheerios fell by more than 40%. Walmart's prices for nationally-branded food were actually lower than both Dollar General and Family Dollar's.
- Target: "We believe that consumer perception of value at Target has not reflected how low our out-the-door prices are," chief executive Brian Cornell told investors last year. Cornell has guided the company through a $7 billion investment phase, including slashing prices, to firm up sales.
- Kroger: Kroger isn't spoiling for price war, but it's prepared to fight. "We're not going to lose on price, but we're not out there trying to lead the market down," CEO William McMullen said to investors in March. Kroger has "felt the negative consequences of a resurgent Walmart more than anyone," analyst Mushkin said.
Competition is Building
Competition is up and Amazon is at the center of it with its purchase of whole foods. Half of Costco's sales come from food. Groceries make up 56% of of Walmart sales.
Food is a Bargain
Food is a bargain and has been for something like forever, despite all the whining from people who don't have a freezer and don't know how to shop.
Apologies offered to vegetarians who insist on organic. They may legitimately see things otherwise.
This past weekend, I got boneless whole pork tenderloin at $0.98 a pound and prime T-Bone steaks at $5.88. Both had limits but my wife and I each took a cart and checked out separately.
This was a grand opening at Mariano's, owned by Kroger. I am unsure if this was local pricing or national.
I keep repeating myself, but if you think food inflation is high, then get a freezer and learn how to shop.
Real World Inflation
Food aside, in the real world, inflation is mostly understated.
Those paying for their own medical insurance tell me their costs are up $2,000 or more a year!
Home prices are not in the CPI. That alone causes a huge "inflation" understatement.
Trump policies do not help one bit. Tariffs will increase prices, temporarily. Everything the government touches disrupts prices.
Property taxes in Illinois are out of sight, but essentially unmeasured.
Inflation is personal and largely understated.
Wages are up 2.6% from a year ago in nominal terms but only 0.3% real terms.
Click on the link if you want to understand what's really going on.
Mish a New Inflationista?
No. My stance has not changed. Rather, people only hear what they want to hear.
My definition of inflation is as follows "Inflation is an increase in money supply and credit, with credit marked to market".
My definition is not easily measurable, but neither is the CPI.
There is no such thing as an average basket that makes any sense, especially when the basket excludes home prices and assets.
Based on my definition, inflation is high and rising even if we cannot put a specific value on it.
When the next recession hits, asset prices will collapse and loans based on those assets will sink, if not collapse. Consumer prices will likely follow.
Once again, this is how the real world works in a fiat credit-based system.
The Austrians, in general (not this one), made a huge mistake in believing the expansion of money and credit would lead to soaring consumer prices. Many expected hyperinflation.
However, the Austrians are correct in that the seeds of demise have been planted.
Meanwhile, the monetarists at the Fed and the Keynesians who seek still more stimulus are oblivious to the entire discussion.
Asset bubbles are very inflationary when they are in progress. The Fed has blown a doozie. And trade wars are inflationary until trade collapses.
No Economic Benefit to Inflation
The BIS did a historical study and found routine price deflation was not any problem at all.
“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the study.
CPI or PCE deflation is not to be feared.
More precisely, price deflation is a benefit. Falling prices increase purchasing power by definition and thus raise standards of living.
It’s asset bubble deflation that is damaging. When asset bubbles burst, debt deflation results.
If you are seeking one single compelling reason that inflation (as defined by the Fed and the academic illiterates) is not about to soar in 2018, here it is: a massive debt overhang.
Debt Deflation Coming Up
As a direct result of the Fed's total incompetence in understanding inflation, bubbles are readily apparent in equities, in junk bonds, and in Bitcoin speculation.
Another debt-deflation bubble bursting episode is coming up. All it takes is an economic slowdown or a change in attitudes of greater fools willing to chase the market higher and higher.
Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive asset bubbles that eventually collapse.
Treasury yields will collapse when the bubble bursts.
Mike "Mish" Shedlock