Posted 11/16/2007

INFLATION TSUNAMI COMING?

The experts aren't predicting a huge wave of inflation yet. But many economists are beginning to fear one.

For the sea bed is shaking. Shaking like something big is headed our way.

You, too, can see it if you look at the margins.

What are margins?

Margins are the difference between companies' sales dollars and cost dollars. In other words, the difference between money coming in and money going out.

When margins are increasing, everyone is happy. But when costs go up faster than sales, margins, earnings and profit shrink. Everyone becomes unhappy.

And bad things begin to happen.

Companies raise prices to protect margins, earnings and profits.

When enough companies raise prices, the sea bed begins to shake and rumble, forming an inflation tsunami.

OPEC has upped the price of crude oil about 50% in the last 12 months. Which forces Conoco Philips to raise the price of aviation fuel. Which forces the airlines to raise ticket prices. Which is happening as this is written.

And don't think Amtrak is any better. Railroads use oil, too. The government just increased the subsidy by over 50%.

And you already know what's happening at the pump. Going to grandmother's house is going to be very expensive from now on.

Venezuela raised the price of its crude. Which forced Valero to raise the price of fuel oil. Which forces US Steel to increase the price of rolled sheet metal. Which forces Caterpillar Tractor to up the price of tractors and farm equipment.

Despite rapidly increasing foreign sales, the big Cat reported lower margins and profits last quarter due to rising costs. You can bet the house that management is planning some big price increases next year.

Because plastic is made from petroleum feed stocks, which comes from oil, you'll soon see everything from plastic plates to car parts to cell phones going up in price.

Even Exxon-Mobil suffered as crude oil went up and gasoline and natural gas prices increased more slowly, causing earnings to drop over four percent. The next CEO retirement package is less likely to reach $400 million again.

Royal Gold saw sales go up 29% on the rising price of gold, but expenses went up even faster, pushing down earnings. Energy, mining equipment, transportation and processing costs all went up faster. Wait ‘til you see the price of that new gold cap your dentist wants to install in your mouth.

Our ethanol subsidies raise the price of corn, which forces the beef producer to raise the price of beef, which ups the price of meat on your plate. Increasing corn and grain prices are forcing Kelloggs and General Mills to up the prices of everything from Corn Flakes to Lucky Charms. With grain prices soaring, you can expect to see the price of a box of cereal go up 5% or 7%. Even store brands will begin to look pricey.

Procter & Gamble and Colgate have said they are going to raise prices soon to overcome the rising costs of the commodities used to make soap, detergent, paper and toothpaste. P&G announced increases of 4% to 8% in coffee prices, 9% for fabric softeners, 5% to 8% for Olay and Ivory cleansers, 5% to 8% for Pampers, and 3% to 5% on Gillette razors and blades. If Pampers and Crest both go up in price, will some babies have to choose between clean teeth and clean bottoms?

Things aren't any better at the local pawn shop. FirstCash reported third quarter sales up over 50%, but earnings increased only 28 percent, putting pressure on margins and forcing company market value down over 12%. Don't look for easier terms the next time you pawn your grandfather's pocket watch.

It's even happening in China. Manufacturing is beginning to slow a little because "input prices" are outrunning sales prices, putting a big squeeze on margins. The shortage of "dry merchant ships" is driving up the costs of grain, iron ore, steel, copper, coal and many other commodities. The price of shipping a boatload of iron ore from Brazil to China has gone up from $65,000 a day to over $180,000 a day. With everyone in China raising prices, the inflation tsunami may be forming in the China Sea right now.

If you look at all the numbers on this page, you won't find a single one meeting the Federal Reserve Bank's target of 2.3% inflation. Everything is going up faster than that. And if you toss in taxes, college costs and medical costs, you will begin to feel the sea bed rumbling.

The only questions are: How big and how soon will the tsunami hit?

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