Oil at $96, Gold at $800 (Fed belatedly worried about inflation)

by: Barry Ritholtz

Everybody loves an easy bartender, pouring generous drinks, filled with lots of alcohol.

No one likes the hangover the next day.

Which is what we are experiencing today.

Gee, who woulda thought that cutting rates yet again would spark another round of dollar weakness AND commodity inflation? The inflation picture remains front and center, as indicated by yesterday's FOMC statement, which noted that the risks of weaker growth and higher inflation were balanced.

Stop to consider for a moment what that means. We know that, notwithstanding yesterday's bogus GDP number, growth has slowed, the consumer is starting to tire, Housing is an enormous economic drag, and the credit crunch continues to be a worry. DESPITE ALL OF THIS, INFLATION RISKS ARE ROUGHLY BALANCED.

Consider how bad INFLATION must be, if that's the case. A few recent examples:

P&G, Colgate Plan to Increase Prices: Higher commodity costs will increase prices between 3% and 12% on consumer stables like diapers, fabric softener and pet foods. P&G gave an anemic outlook for the current quarter, noting it was seeing some slowdown in the U.S. market as consumers are hit by high energy costs and the housing downturn. "There is not going to be much customer resistance [to price increases] because they are seeing the same energy and commodity cost increases." -A.G. Lafley, P&G's CEO

Kraft Foods whose third-quarter profit fell 20%, is the latest consumer company to warn that rising commodity prices will continue to take a big bite out of profits. High commodity costs have put the company in somewhat uncharted water. To offset high dairy costs, Kraft has raised cheese prices by an average of 7% this year. But those increases, besides driving some consumers away, weren't sufficient to offset higher raw-material costs.

Commodity Prices Rise to Record on Slumping Dollar: Commodity prices rallied to a record as a decline in the dollar enhanced the appeal of energy, grains and metals as a hedge against inflation. The UBS Bloomberg CMCI Index of 26 commodities rose to 1,271.20 today, the highest ever. Commodities have gained 3.9 percent this month. The UBS Bloomberg gauge jumped 7.8% in September and was headed for a sixth straight annual gain.

By Rail or Road, Travel Costs Rising in New York Region: The agencies that operate the buses, trains, tunnels and bridges that spill commuters into Manhattan are in the midst of one of the biggest and most sustained rounds of fare and toll increases in decades. The MTA board wants to raise tolls and fares on its subways, buses, commuter rail lines, bridges and tunnels by an average of 6.5 percent. The Port Authority of New York and New Jersey is hoping to raise tolls by at least 33% on its Hudson River crossings early next year.

Record Diesel Prices Squeeze Commercial Construction: Average price of diesel, $3.157, ties the all-time high set two years ago. “This will squeeze contractors’ margins on existing projects and push up bids on future work, especially highway and other projects that require a lot of earthmoving, which is very diesel-intensive."

Business-Travel Costs on the Rise: Business travel costs, including airfares and hotel and car-rental rates, will continue to rise next year, and companies will respond by cracking down on employees' compliance with corporate travel policies, according to the American Express 2008 Global Business Travel Forecast, released this week.

Small Firms’ Data Indicate Persistent Inflation

FedEx to Raise Rate For Express by 4.9%: FedEx said it plans to increase rates on air shipments by its largest percentage in more than a decade early next year, reflecting the company's need to squeeze more revenue from customers amid a weakening economy to cover the costs of its China expansion and the rising price of fuel. The move will raise the cost of the average U.S. air package 6.9% on Jan. 7, compared with this year's 5.5% increase, which had been the biggest jump in 10 years.




By Rail or Road, Travel Costs Rising in New York Region
NYT, November 1, 2007

Dollar Ben
November 1, 2007; Page A18

Commodity Prices Rise to Record on Slumping Dollar
Millie Munshi and Pham-Duy Nguyen
Bloomberg, Oct. 31 2007