Inflation Hits Annualized Rate of 16.8%

Gas is up 52%

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ian bremmer @ianbremmer

u.s. annual price changes in march 2022 fuel oil +70% gas +48% used cars/trucks +35% airline fares +24% meats/poultry/fish/eggs +14% electricity +11% dairy +7% apparel +6.8% rent of primary residence +4.4% -bls

Yesterday, Joe Biden went to Iowa and pandered to corn growers. He is lifting an EPA restriction on the amount of ethanol a gallon of gas can contain. People who follow the fuel industry and understand the engineering around producing fuel know that ethanol is a terrible additive to fuel. It decreases gas mileage. It’s not as efficient as gas.

Remember, Biden is doing this when farmers are going to pay significantly more for fertilizer because of his administration’s missteps in Ukraine leading to Putin’s invasion.

Biden’s actions yesterday just increased corn prices ($ZC_F).

Corn is a major feed used for livestock. The price of beef, pork, chicken, turkey and other livestock just went up. You might not know it, but Avian Flu has swept through the chicken population forcing farmers to cull chicken herds. That drives up the price of eggs. Eggs are generally regarded as a cheap source of protein. Not anymore. The smaller supply of chicken and expectations of a smaller supply also drives up the price of alternatives, like pork. You can see the effect of the Biden proclamation in this Lean Hog futures ($HE_F) chart.

Notice, nothing Biden is doing or anything in the broader market is driving down the price of anything. He’s done nothing to improve the supply situation around oil either. Releasing the “strategic oil reserve” is laughable to the market. It’s a band-aid on a market that needs an amputation. Gas prices will go higher. Inflation is only going to get worse, not better.

For edification, here is a five-year price chart on crude oil.

For those that cling to the idea that this bout of inflation is purely transitory, please look across the Pacific Ocean to China. They locked down Shanghai, and are talking about locking down Guangdong due to Covid. Bullwhip effects on supply chains will remain.

Lockdowns are stupid. Economist Casey Mulligan just put out a study on the fifty states and how they did during Covid. Here is a link to the original source, the working paper.

Remember, there are costs and opportunity costs to lockdowns. It’s not just about reported cases and deaths. The study found that states which had strict lockdown policies and mask mandates were more detrimental to their citizens than states which didn’t. Florida and Texas which have large populations did a lot better than California and New York.

The Chinese aren’t pursuing lockdowns out of health concerns. They are doing it to assert more control over their people.

Inflation is real and it is not going away in the near future. I initially thought it might be transitory but the data proves that thesis is wrong.

I just bought some outdoor furniture for my house. I bought three swivel chairs and a couch. They delivered the swivel chairs promptly, but the couch won’t come until May. Two days later, we decided not to get the couch. We went back to the store to cancel the order and buy another swivel chair. They said that the chair won’t get here until May, and the price they wanted to charge us was 25% higher than two days prior.

There is one solution to this problem. Drastically cut government spending and raise interest rates. Which political party has the appetite for that?

As a transplant to Nevada from Illinois, I have watched the local housing market here very closely. As a former Chicagoan, I am not used to seeing housing prices jump by double-digit percentage rates in less than a year but that’s what has been happening here in Nevada. A year and two years ago in my development, there were dumpsters all over the place. People were buying homes and rehabbing or updating. I was one of those people and I started my rehab in May of 2021. I am still trying to get it finished. There are fewer dumpsters in my development now. Part of that is that over the past few years, a lot of homes have been sold and rehabbed, perhaps a quarter to a third of them. The other part is it is impossible to rehab and make a large profit now. I bought my house in August of 2021. An exact same model with a similar lot that hadn’t been updated just sold for 34% more a month ago. The last part is if you wanted to rehab, you can’t afford to do it and you can’t get materials or labor at any price.

The cost of rehab has gone through the roof. My contractor told me he couldn’t believe the cost of gasoline just to keep his operation running. Labor is scarce and the cost of it is going a lot higher. All of his subcontractors are facing the same wall of inflation.

My guess is that the rehab market will fall apart since the cost of materials is screaming higher. This isn’t transitory. I can’t get furniture. I can’t get light fixtures. I can’t get durable goods like a SubZero 30” column freezer that I ordered in February of 2021. When you look at something it’s not weeks to get it, it is months. Grrrr.

One interesting phenomenon is that used goods are commanding higher prices. We have seen it in the used car market, but go check out sites that deal in second-hand furniture, light fixtures, and other durable goods. It’s interesting but macabre as you know what’s driving the underlying sentiment.

California Governor Gavin Newsome is one of the best realtors in the United States.

In the short run, inflation will drive homes that are updated higher in price. There is always a bit of a premium for them, but the marginal premium should be significantly higher because of inflation and the inability to get goods.

I don’t see how the stock market holds a bid.