Tuesday, April 22, 2014

Inflation: are the fundamental changing?

StatsCan February 2014 
Consumer Price Index


Unsurprisingly the CPI was up for February -- Energy costs were way way up for the year -- Oil and Gas +9.2% and Electricity 5%.  Energy is a big component up here in Canada, the cold weather makes Canadian high energy consumers.  A few weeks ago I mentioned that the IPPI (producer's costs) were rising fast -- The CAD is going nowhere fast so the outcome is a bit of inflation.

Could this be the real thing, a resugence of "permanently higher inflation? In 2010 and 2011 we went through a similar cycle as energy costs rose dramatically, but when prices fell, so did inflation.  Inflation can only rise if the economic agents have pricing power -- if labor and producers are price givers.  Right now it seems they are both price takers:

Labour:

Fewer workers are unionized, and when they are it is benefits that are at the core of their demands.  Benefits erosion is the key labour risk and not inflation that has been low for more than a decade.  Labor union seek to protect pensions and benefits...

Capital:

Certain key players in the economic process are being squeezed out.  Corporations are doing great; my guess partly because of the squeezing out of the middle men.  Profits (as a percentage of sales have never been higher), what is happening is that the middle men and the high street shops are bing squeezed out of the process.  As an example:  several years ago I need to replace a shower head.  Three different prices:  the plumber said $600, the wholesale $500 and the internet $199.  The plumber told me that he could do it but it was a waste of my money (nice guy), middle man generated negative value -- he would neither delivery the product and required that I drive to his store since he would not take a phone order.  The internet well 5 days later the shower head was delivered to my door...

Malls are dying all over America -- the middle man who adds no value is being priced out, and the benefits are being split between the manufacturer and the consumer.  How many time have you gone to "The Brick" or "Futureshop" the shop assistant (when you can find one) knows nothing of the product -- except that A is more expensive than B.  Middle men are so worried that they are introducing legislation to stop Tesla direct sales (car dealers in New Jersey and elsewhere)

A recap:  Labor is looking elsewhere, capital is in transition (e.g. middle man death) but there are other forces at play.  Aging population, the baby boomer are leaving the workforce and the consumption "racket".  Your dad's 30 year old trousers "still fit fine".

Economic theory is created from the early 20th century (ok the late 19th century too), but these were young societies, this is no longer the case.  By 2060 Japan's population will have shrunk from 128 million to 75 million.  That has an impact on economic drivers.  Like hospitals and doctors 20 years ago, economists have to recycle their skills (and theories) on the the levers that control the engine of economic growth in a post baby boom economy.

That changes how the economy functions.



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