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Main street inflation is here.


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Add to this that there are farm labor shortgages, forcing less crop planting, less havesting this summer/fall, and higher food prices. Supply chains are now bull-whipping, and almost everything in your grocery store has already risen 5-15% since the start of the year. Cost-push inflation is here, and there are at least a years worth of accross-the-board accumulated cost increases to work through. Energy price increases sitll to come, as economies progressively come out of lockdown.

https://www.cbc.ca/news/business/bakx-mattress-fitness-office-furniture-inflation-1.5998221

Not a bad thing overall, but it means a coming end to much of the capital market excessess that have been seen of late. 

SD

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The inflation topic is interesting. It is weird that as a consumer, one sees inflation everywhere, and yet the CPI figures are still hanging around 2%. It seems like the bigger question is whether the inflation is here to stay. Is most of the inflation due to demand build up and supply constraints related to the pandemic? Does all this get resolved over 12-24 months? Or are we setting up for an extended period of growth and higher prices globally? There's smart people on both sides of this debate. 

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One key will be wages. If the increase in prices results in workers demanding higher wages that will be a game changer (Inflation expectations). My guess is if we start to see wage inflation (not likely until 2022) the Fed will react.

A second key will be commodities. Are we at the start of a super cycle? 

A third key will be how long it takes for the global supply chain to get back to normal once covid is in the rear view mirror (if that actually happens).

A fourth key will be how much production moves out of China/Asia and back to the US (semiconductors is one example) and what that means for costs moving forward. 

Edited by Viking
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1 hour ago, Viking said:

One key will be wages. If the increase in prices results in workers demanding higher wages that will be a game changer (Inflation expectations). My guess is if we start to see wage inflation (not likely until 2022) the Fed will react.

A second key will be commodities. Are we at the start of a super cycle? 

A third key will be how long it takes for the global supply chain to get back to normal once covid is in the rear view mirror (if that actually happens).

A fourth key will be how much production moves out of China/Asia and back to the US (semiconductors is one example) and what that means for costs moving forward. 

I think wage inflation is a definite possibility. All the small business owners I know are having a hard time getting staff. Some of that is likely pandemic related, but there are also many businesses who have less staff because of the pandemic, which is at least a partial offset. 

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1 hour ago, tede02 said:

The inflation topic is interesting. It is weird that as a consumer, one sees inflation everywhere, and yet the CPI figures are still hanging around 2%. It seems like the bigger question is whether the inflation is here to stay. Is most of the inflation due to demand build up and supply constraints related to the pandemic? Does all this get resolved over 12-24 months? Or are we setting up for an extended period of growth and higher prices globally? There's smart people on both sides of this debate. 

It is not very surprising at all that people see inflation in the real world yet some politically consequential index created by politically motivated human beings doesn't show it.  The CPI is completely contrived and totally useless for any real world information.

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Posted (edited)

For now, while the focus is on getting ICU numbers down and people vacinated against Covid, it is a back-burner thing.

But once people start returning to work, it is going to quickly emerge that pay just isn't stretching as far anymore - and the sh!te hits the fan. The minimum is going to be the 2.74% increase in the 2021 budget federal minimum wage from $14.60/hour to $15/hour, and unions will collectively demand increments on top of that.

If you hope to be re-elected - you are not going to cheap out on the wage demands of health care workers that have literally just saved your voters lives. You are going to pay over that, and you are going to extend it into the LTHC sector as well - so that grandma's covid death is not held against you. And you are also going to do what you can to push more money into pernsioners hands, as soon as you can, to compensate for those higher costs. Cost-push inflation, and sooner versus later.

Not a bad thing, but it would seem pretty clear that we're not going back to the way things were.

SD  

Edited by SharperDingaan
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3 hours ago, bizaro86 said:

I think wage inflation is a definite possibility. All the small business owners I know are having a hard time getting staff. Some of that is likely pandemic related, but there are also many businesses who have less staff because of the pandemic, which is at least a partial offset. 

Isnt this kind of how it starts? They have trouble getting staff, cant meet pent up demand, and as a result wages must go up. 

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I think wage inflation may not hit until 2022 There are some who are waiting for all of the extraordinary stimulus to fade away before saying that there will be massive wage inflation. I think if we're still seeing tightness in the labor market when people have to go back to work but don't for whatever reason then that will sound alarm bells for me.

Anecdotally speaking, a company I know has lost multiple maintenance people to Amazon because they can "sit in an AC controlled room and then go out on the floor when something breaks" and probably make more money. The same company is missing ~8-15% of its budgeted staffing at multiple sites, and the HR person has told me that when she contacts temp agencies, there are physically not any people walking through the door. 

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When hiring for my company, it’s been more difficult to find employees and we need to pay higher wages just to get them to start, then give raises to keep them. It seems like everyone is strapped for workers, so wages are going up. Typically 25%-50% higher for the same positions as last year.  
 

Excluding lumber which is up 3x, basically everything from wire nuts, to Egg McMuffins, to Pepsi, HVAC parts, to anything and everything else is up at a minimum 10% and most up 15% or more. My city just raised water prices by 45% too (oh joy).  
 

Fortunately though, because all of my competitors are facing similar cost increases, we’re all raising our prices so it’ll even out on our end. 

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19 hours ago, rkbabang said:

It is not very surprising at all that people see inflation in the real world yet some politically consequential index created by politically motivated human beings doesn't show it.  The CPI is completely contrived and totally useless for any real world information.

Question

So which index would you use or do you think such aggregate measures have no use?

Reason for the question

This week, i spent some time on railways and BNSF and, dissecting the info, there were several aspects that relied on aggregated measures like CPI (commercial contracts with multi-year inflation escalators, contract clauses with workers for gradual wage inflation, actuarial reports about large pension plans (discount rate , rate of compensation increase, rate of inflation for medical costs etc)).

Also, do you think CPI should include asset inflation components as well which are a significant 'concern' for individuals ("in the real world")? For example, Since the late 1990s, the ratio of market value of the residential real estate and domestic equities to nominal GDP ranged between 2.5x and 3.75x times, nearly twice the level that existed in the prior 50 years (end of 2020, the ratio at 3.75x). Or do you think these asset inflation measures are useless as well?

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Posted (edited)

Just to add to the staffing discussion ...

At our small craft brewery, to avoid layoffs everyone has worked for an extended period at reduced hours at reduced pay. Costs are up everywhere, but the real issue is supply chain availibilty - hard to reliably make beer when you cannot get hops, malt, cans, etc. - and you have to outbid a major in both price and quantity.

Beer is a close knit community. Like most our size we track the cummulative wage loss monthly, and discuss with staff on an ongoing basis. Most brewers have agreed to restore pay rates as soon as practical, then pay 15-20% over that untill the cummulative loss has been eliminated. The extra cost temporary reducing owner returns, but retaining employees as to walk away is to leave $ on the table.

Once the accumulated loss has been paid off, we will have to raise pay rates; most expect by 7-10% depending upon how long it takes the economy to 'recover'. Beer will cost more, and there will be more collaborative contract brews to reduce costs. Very good beer still available, but less variety.

SD  

 

Edited by SharperDingaan
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Quote

A McDonald's restaurant in Florida is paying job applicants $50 for turning up to an interview amid struggles to hire new employees. The franchise owner, Blake Casper, who has 60 McDonald's restaurants in the Tampa, Florida area, told Insider that a general manager gave him the idea for the interview reward after telling them to "do whatever you need to do" to hire workers. Casper he believes it is difficult to hire workers at the moment due to the number of businesses reopening and hiring, alongside enhanced unemployment benefits.

...

Casper also said he is considering raising starting wages to attract more employees. The McDonald's restaurant currently pays $12 an hour, which is $3 above Florida's minimum wage, but he is considering increasing the wage to $13.

https://www.newsweek.com/mcdonalds-restaurant-offers-job-applicants-50-turn-interview-1585692

Edited by maplevalue
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Posted (edited)

Costco has essentially made 'hero-pay' permanent for the front-line staff. About 15-20% more for the cashiers, stockers, baggers, etc.

https://www.thestar.com/business/2021/04/24/costco-gave-its-workers-a-permanent-pandemic-raise-and-didnt-tell-anyone-another-reason-why-its-developing-a-cult-like-following-in-canada.html

Much of the franchise industry is not viable under these cost pressures, and will have to either shut down or 're-structure' their operational model. Long overdue as many are extremely abusive, but it will mean a lot of failed businesses, and less employment for longer. In most places, indentured slavery was banned a long time ago.

SD

 

 

 

 

Edited by SharperDingaan
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1 hour ago, maplevalue said:

A comment about the indentured slavery.

There are many factors behind the short term wage inflation pressures in Florida but people are often efficient at integrating opportunity costs. The potential pool of able-bodied workers is (still) large.

In my area and for years now (it's worse this year), people in the agriculture industry (basic manual farm work, fruit picking etc) cannot find domestic workers that will do the  job even when wages are increased, bonuses are offered etc. Instead, it's less expensive to arrange for workers from Central America to be flied, roomed and boarded and paid for the season and this work importation program is subsidized (generously) by the federal government. Is this inflationary after the bullwhip bump?

FL LPR.png

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I have a small farm and keep an eye on corn and bean commodity prices.  Shortages in the stockpiles of corn and beans reflect the 31.1% increase in corn and 15.7% increase in beans since 1/4/21.

Edited by JGBRK
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Agreed, temporary workers have been the traditional solution for farm work. But competition is now a lot harder, and costs are a lot higher. Farmers now must charter flights, pay for immediate vaccination, pay for ongoing testing, and pay the coordination costs of keeping the workers employed through their entire stay. Some nations also offer a path to citizenship, changing the game entirely.  

Ultimately, temporary workers are only viable if the cost of importing the food is more expensive than the cost of producing it locally. Grow in South America/Caribbean, import the food directly, and do not use temporary agricultural workers at all – a common practice in much of Europe. Of course, temporary workers are still used - but in higher value-add construction, not farm work. 

Hard for a McDonalds to staff with temporary workers, even if they could. Hiring temporary workers simply proves to critics that your business is too cheap to pay a living wage, and your management too incompetent to restructure the business to do so. Press loving protestors at your AGM, pushing indefensible optics, really screw up your day. 

Lots of ways to tilt the table, and many are - but not really an option for the fast food and restaurant industries. 

SD

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As the world gets better outside North America, there will be less workers because they won´t want to come. There won´t be a better quality of life. Therefore these countries will need to automate more. If they cannot they will have to pay more, causing very high inflation. Then, these countries will begin to ask, why don´t people want to come here anymore? They will pass infrastructure bills and spend huge amount of money they do not have to try to improve the conveniences and quality of life. This is not always possible as the quality is often cultural and often actually involves overbuilding - but in the right direction. This is a new continent. Europe has had 1000+ years to perfect infrastructure, layout and living. Much of it actually was post ww2 so we cannot say it is time I think. Perhaps it really is an attitude and priority issue. I also think more northern places will always have inferior infrastructure to more southern given the climate issues. Humanity evolved in the mid-tropic regions with mild weather, abundant food, agriculture.. all things being equal living in extreme environments is like living on Mars, you have to be a gluten for punishment. The question is why people do it. Perhaps there are some benefits but it does have economic consequences.

Edited by scorpioncapital
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  • 4 weeks later...

So just from an observational standpoint, things are pretty interesting right now. Inflation is definitely here. Costs are soaring...but I am also not noticing anybody except financial people being bothered by it. Was with the kids and in laws out on the lake this weekend, and a few big observations....

 

First, WHOA, if you have a longer term approach, cycles are very easy to see happening. When I moved to the area I live, I bought my first boat in 2014 and no one wanted boats and the lake was crowded(most popular lake in NJ) but not crazy. Even now, we're still basically in early preseason, everyone has a boat, marinas are packed, midday on the lake on a weekend is a nightmare. In favor...Out of favor. I ve had the same thought over time in a lot of other areas. Sometimes on a short sighted basis, its hard to discern where we are in the grand scheme of things, but when you step back I think its really easy. Another point of caution as far as the markets go. 

Despite lumber costs soaring, building is booming. All over the lake and surrounding areas you have additions being done, new houses replacing old ones....if increases, and big freakin increases is hurting people...I just dont see it. 

Everyone is doing well. The "big truck douchebag index" is at a high I havent seen in maybe 15 years. Also soaring is the "moneyed up meathead with gold chain, barbed wire tattoo, LVMH/Gucci attire, leased Cadillac or Maserati index"....If whats going on right now isnt hurting people....what needs to change? While I agree stimulus is playing a role, its not buying boats or new cars(that I know of)...yes financing is key, but thats been there for a while. If the Fed budges things 1-2%, is that really hurting people? Frankly I'd rather have a 2.5% 10 yr than $10 for a pressure treated 2x4. 

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Posted (edited)
14 minutes ago, Gregmal said:

So just from an observational standpoint, things are pretty interesting right now. Inflation is definitely here. Costs are soaring...but I am also not noticing anybody except financial people being bothered by it. Was with the kids and in laws out on the lake this weekend, and a few big observations....

 

First, WHOA, if you have a longer term approach, cycles are very easy to see happening. When I moved to the area I live, I bought my first boat in 2014 and no one wanted boats and the lake was crowded(most popular lake in NJ) but not crazy. Even now, we're still basically in early preseason, everyone has a boat, marinas are packed, midday on the lake on a weekend is a nightmare. In favor...Out of favor. I ve had the same thought over time in a lot of other areas. Sometimes on a short sighted basis, its hard to discern where we are in the grand scheme of things, but when you step back I think its really easy. Another point of caution as far as the markets go. 

Despite lumber costs soaring, building is booming. All over the lake and surrounding areas you have additions being done, new houses replacing old ones....if increases, and big freakin increases is hurting people...I just dont see it. 

Everyone is doing well. The "big truck douchebag index" is at a high I havent seen in maybe 15 years. Also soaring is the "moneyed up meathead with gold chain, barbed wire tattoo, LVMH/Gucci attire, leased Cadillac or Maserati index"....If whats going on right now isnt hurting people....what needs to change? While I agree stimulus is playing a role, its not buying boats or new cars(that I know of)...yes financing is key, but thats been there for a while. If the Fed budges things 1-2%, is that really hurting people? Frankly I'd rather have a 2.5% 10 yr than $10 for a pressure treated 2x4. 

It is the multiplier effect including asset value inflation at work. Many things are not bought from cash flow, they are bought via gains from asset inflation. If this reverses, the wealth effect and the Lambo’s (a classical douchebag / nouveau rich indicator ) will get scarcer too.

15 years ago was 2006 and we know what happened next. I don’t think we are close to some meltdown, but those are hard to predict and only obvious in hindsight.

Edited by Spekulatius
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Throughout Covid, most people have been spending a lot less than they would otherwise have. Multiply the saving by 14 months+ and the cummulative total is enough to burn a hole through most pockets. Restrictions are being lifted, people just want to celebrate, and for now the cost matters little - until the savings are spent. The fed hopes that before that happens - the recovery either gets you a higher paying job, or you are working more hours. 'Cause as long as new cash inlow exceeds outflow, or deficts can be met from savings, there is no pain.

Of course this isn't really sustainable beyond 5-6 quarters, or 2 years depreciation on the Lambo. Simply pick what you like, check out all the features, and wait for the toys to come back on the market. Upgrade the company car, and make it a business expense!

SD

  

 

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Yea I dont think we get a melt down of any grand proportion. For one thing, theres just too much liquidity in the system. Its why ARKK and non FANG tech crap is just kind of slowly deflating rather than crashing. But this also feels different. Not in the sense of "this time its different" but in the sense that while there is definitely speculative excess and exuberance in some places...it seems more isolated. Crypto can go to hell(interestingly I think crypto has minted more poor and middle class wealth than anyone wants to admit), tech euphoria can burst....but in terms of every day life and all that...I think people are doing "well" finally. I dont see many people with multiple spec houses or 500 FICOs taking out SI IO mortgages...In a strange way it almost kind of seems like things are in a good spot. There's always hand to mouth types and of course when housing is hot there's dipshit mortgage guys/agents/contractors flaunting wealth. But I think we currently have a very high standard of living here in the states. And I kind of think its sustainable in the sense that labor market's supply/demand imbalance are going to start really rewarding people. Housing will continue rewarding people. Infrastructure spending will help people. There will be ups and down and like I mentioned the post before, we clearly arent at the bottom of the cycle anymore....so be cautious as always...but it also seems like there's some pretty good tailwinds in certain places. 

 

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Just some anecdotal evidence of inflation I’ve seen in my personal life this past week.
 

Groceries:  Bought a bag of 6 green peppers, single red onion, spring mix lettuce, portabella mushroom sliders, bbq sauce,  quart of raspberries 

$27....for vegetables.....the onion alone was 2.50....

McDonald’s: Grabbed two McDoubles (1.39 ea), small fry ($1.56). Came to like 4.70 after tax. Haven’t been in a while but that seemed significantly more. 

Lowes: Two 8ft red oak corner trim pieces, 1 8ft pine finger jointed cove trim, a single brass door hinge, two simple hooks for hanging tools in a garage, tube of white lightening caulk. $90.....

Went out to dinner with the wife two a small brewery near us. For the usual pub food dinner and two drinks each we paid $100 before the tip...same food and drinks cost us $65 a little over a year ago. 

Ive also noticed that almost no stores seem to be having sales on clothing/goods. Could be two things....pent un demand so no need to lower prices or making up for lost revenue/increased costs behind the scenes. 

in general I’m seeing about a 50ish % increase in prices of pretty much everything. Now I’m not poor, I have no kids and I budget wisely so it’s not killing me. But for the folks who barely make ends meat, I’m sure it’s killing them. Especially the groceries. My area is not HCOL by any means so I can’t speak for those who live in NYC etc. My prices might be lower than your average costs :classic_tongue:

 

 

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@CastanzaSome of the above is transitory. I have not noticed much inflation with groceries. Restaurants are getting more pensive for sure, but it seems to be more in the 5-10% range than 50% range. The long term driver for inflation will be wages, not lumber or other commodities.

 

I think we are done with trickle down economics if this thinking goes into action:

 

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