Alan Rappeport and Robin Harding have an interesting piece in the FT. Apparently, the chief financial officer of Pepsi is arguing that food and commodity inflation–given the fact that wages are stagnant or declining– is forcing consumers to cut back. He says that Pepsi is not passing on most of the costs to consumers… yet.
From an investment standpoint, this suggests that profits in US consumer companies are likely to decline, with an interesting paradoxical effect. In the 1970s, we had inflation, but incomes were rising about as fast, so consumption did not decline so much. Now we have inflation, but without the corresponding rise in income. The net effect will be to reduce growth, at least in areas where commodities are a major cost driver: cars, travel, clothing, construction, dining out… the list is long. Areas where commodities are not a strong input, like software and services would not experience the same cost squeeze.
I don’t think this will end well. We really do need to have rising wages and rising efficiency, so that the unit prices of commodity-intensive things can rise without causing people to forgo consumption simply because they are priced out of the market. Unions! Supertrains! Fewer wars! Stuff like that. Unfortunately, the Tea Party is not likely to allow the necessary to happen, meaning that it will happen, just later and more explosively.
Anyway, for a company exec to make the argument is better than for me to make it. The Fed and the Congress might actually listen to him.
While you’re there, don’t miss the piece by Javier Blas and Jack Farchy on how Glencore bought wheat futures, then urged the Russians to ban exports. Their profits doubled. But ::smirk:: speculation isn’t affecting prices.
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Added. Comment of the Day Award goes to Robert Scheer: ” It is time to admit that we are, in practice if not surface appearance, close to the Chinese communist model of state-sponsored capitalism that sacrifices the interests of ordinary workers…” As Scheer says, that’s not because of big government, but because of government capture by corporate interests.