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Channel stuffing . . for inflation?

Feb. 13, 2011 3:47 AM ET
Jasper M profile picture
Jasper M's Blog
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   One of the "signs of recovery", I am told, is a build up of inventories. Why this is a good sign is a bit beyond me, as inventory overhang is general a prelude to, and measure of likely severity of, your typical, garden variety recession. And in an economy as wobbly as our own is now, this should be doubly true. But never mind, it's in the metric, 'tis not for us to question

    Over at Zero Hedge, it has been pointed out that, in the auto industry (which is a big chunk of manufacturing in this country), most of this build up of inventory has nothing to do with sales. It is, to use a phrase Tyler Durden introduced me to, "channel stuffing" – making the business numbers of the companies, and the industry as a whole, look artificially robust, by raising output just to pack the distribution channels (car lots, in this case) with product, irrespective of the likelihood of the marginal supply actually being sold anytime soon.
    While this might seem pointless at first glance, even to the jaded cynics in what's left of the US auto industry. But consider that big chunks of that industry are set to have their government ownership stakes put up for sale around that time. Thus, they have Every incentive to embrace Any means of appeasing those masters, however temporary.
    And it is temporary. It is not much different than the Fed artificially lowering interest rates – one 'pulls forward' future demand, the other pulls forward future production.

    Well, I think this is happening in another arena, unnoticed.
    Various commodities have been experiencing a lot of volatility lately. And it's always the up moves that get the publicity (as I write this, gold still c. $70/oz off its recent high). I hold this is due to low interest rates making speculation cheap, and easy, but I have argued that point elsewhere.
    Some Wholesalers are now trying to pass these prices on to consumers. Whether this is genuine concern for necessity, or a cynical attempt to use headlines to probe for a higher level of 'what the market will bear' I cannot tell.
    But for my purposes, the motive is irrelevant. My question is, Are these price rises relevant to the various inflation metrics, if people are not buying?

    To illustrate the relevance of this question, let me refer you to Reggie Middleton's criticism of the Case-Schiller housing index. While not dismissing its utility altogether, Mr Middleton (probably the smartest man in whose work I have regular access to) points out quite cogently that it is not adjusted for change in volume of sales. This, if homes sell for a few dollars more than last year, but you are only selling 20% as many, that's a huge problem if you are in the housing biz, but would Not reflected in Case-Schiller methodology.

   Thus to my central thesis: All these products which are having thei prices marked up – who is buying them? Are they buying at previous voume? They don't seem to be in my neck of the woulds, but that's anecddotal. As far as I know, no consumption data has been compared to this or that Price Index. Until it is, we can't really claim inflation. Because a rise in List price, in the abscence of sales, or at least expectation of sales, is akin to channel stuffing.
    Here I'll throw in an anecdotal data point of my own: Retail prics for chocolate are crashing where I live – and that's over Valentine's season!
     Yes, a shopper who finds a favored brand costlier, may just buy it anywhay. But they might buy less, or try a cheaper brand next time.
     It seems to me any expectation to the contrary is reliance on the Myth of Enelastic Demand. And that fallacy is a rock that has shattered many people's economic theories. There's Always a cheaper way. ALways. And these would be pioneers of higher prices may find themselves replaced, and irrelevant.

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