A Pirate Walks Into a Bar…

Brit Ryle

Posted January 29, 2024

A pirate walks into a bar with a steering wheel hanging off his belt. Bartender: “what the heck is that for?” Pirate: “Drives me nuts.”

That’s exactly how I feel everytime I see an average American tell some nightly news interviewer that inflation is a huge problem – it drives me nuts. 

Because the simple fact is, the inflation that spiked in late 2022 and dominated the U.S. economy for the first half of 2023 is over. 

This past Friday, January 26, the latest Core PCE Index number came out at 1.9%. PCE stands for Personal Consumption Expenditure. It’s a wide ranging price index that tries to measure what Americans pay for stuff. It’s also the Fed’s favorite measure of inflation. And the Core PCE Index has been below the Fed’s 2% inflation target for 4 months now. 

The trend is your friend, as they say. The trend for inflation is lower. And in fact, every measure of inflation in existence shows that inflation rates are below the Fed’s interest rates. The Fed should announce an interest rate cut this week. They probably won’t, but they should. 

Now, I understand that a bunch of statistics from the Fed and Bureau of Labor Statistics do not capture the emotions you get when you see the numbers run up on the grocery store cash register.  I’m still shocked when I see the price of one of life’s staples – a bag of Tostito’s Hint of Lime chips – is $5.50, when it was $3.50 less than two years ago. 

I am not going to tell people their experience is wrong. But I will happily tell you that most people are looking for the source of inflation in the wrong place. The vast majority of the so-called “inflation” we’ve experienced in the U.S. is the result of corporations raising prices.

“Of course inflation was caused by rising prices, duh!” you say. 

But the point is: corporations raised their selling prices (or shrunk packaging) far beyond the degree to which their own costs rose. And I can prove it to you with two simple charts… 

The first chart shows the Producer Price Index (PPI) over the last year. The PPI measures prices at the wholesale level:

Now for the second chart, the Consumer Price Index (CPI). The CPI shows how prices change at the consumer level (ie, what you and I pay for stuff):

Crazy, right? 

Now it’s true that supply chain bottlenecks affected prices coming out of the pandemic. All the work stoppages and changes in our spending habits absolutely threw a monkey wrench into supply and demand for all kinds of stuff. But Corporate America ran with it, using the media’s typically hysterical handwringing into a self-fulfilling prophecy about inflation. 

Imagine the boardroom discussion: CEO: “The media has convinced America that inflation is here. What should we do?” All Board Members in Unison: “Raise Prices!!”

And that’s what they did. Pepsi (NYSE: PEP), Coca-cola (NYSE: KO), Mondelez (NYSE: MDLZ), Hershey (NYSE: HSY), Kraft-Heinz (NYSE: KHC) – they all started hiking prices in the second half of 2022. 

One of my favorite examples is Cal-Maine (NASDAQ: CALM), America’s biggest egg producer, with a 20% market share. Last March, Cal-Maine reported first quarter 2023 earnings. Somehow, magically, revenue was up 108% over the same period in 2022. And net profits? $323 million for the first quarter of 2023, after earrings just $39 million during the same period in 2022!

I’ll tell you what changed – last year, a carton of eggs was going for $5 bucks because of “inflation.” 

It’s no coincidence that inflation peaked last January – that’s when all these companies (and more) started to say that their price hikes were done. Here’s a quote from Pepsi’s CEO from April of 2023 (emphasis mine): 

“…as we said earlier in February, we have mostly taken the pricing already this year that we needed to cover for our cost increases. And that is where we stand at this point. We’re seeing a deceleration of inflation, not a reduction of cost, but a deceleration of inflation. And we think that with the pricing that we’ve taken already in most of our business around the world, that should be sufficient. Obviously, there are some markets, highly inflationary markets around the world where we might have to take additional pricing… but the majority of our pricing is already done.”

The bottom line is that Corporate America took advantage of a generational spike in inflation to hike prices and boost their profit margins. Can’t blame them really, that’s what public companies are supposed to do. 

And we’re not going to hear any politicians call the corporations out for price-gouging, since they’re all corporate shills anyway…

No choice but to sit back and let the steering wheel drive me nuts. 

That’s it for me today, take care and I’ll talk to you Wednesday,

Briton Ryle
Chief Investment Strategist
Pro Trader Today
brit.ryle@protradertoday.com
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