Demand-driven price increases are underway

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    James Bianco, president of Bianco Research, believes most of the short-term inflation he predicts will be demand-driven. The fact that a lot of people are spending a lot of money will drive prices even higher.

    At Mauldin Economics’ Strategic Investment Conference 2021, he asked the question: where did this money come from? Look at this table …


    Source: Bianco Research

    The blue line shows the percentage of personal income from government transfer payments. These include social security, disability benefits, unemployment insurance, and various other programs.

    It also includes the three pandemic “stimulus” payments sent to most American adults. The months that these payments were made produced the peaks you can see on the right.

    Note the steep decline after the first stimulus package and before the even higher peak of the start of the second economic wave. Ditto for the third.

    These percentages rose not only because the stimulus payments were so high, but also because wages had fallen. However, the money impulses made no such difference.

    Everyone got their check, used or not. So a lot was saved.


    Source: Bianco Research

    Look again at the steep drop and increase between the first, second and third stimulus waves. Some of that excess found its way into financial assets, causing stock prices, bitcoin, etc. to skyrocket. But much of that was spent on other goods and services.

    Jim Bianco pointed out the increasing demand in a variety of sectors that is outpacing manufacturers’ ability to deliver, as you can see in this lead times index.


    Source: Bianco Research

    Having to wait for an item that would previously have been easy to find in the store is a kind of inflation, even with the same price.

    You get less value than if you took it straight home. This is happening right now and does not appear in either the Consumer Price Index (CPI) or the Personal Consumption Expenditure Price Index (PCE).

    But the actual prices are also increasing. Jim noted it on raw materials and said finished goods prices should follow.

    He showed this graph of several price indices tracked by regional Federal Reserve banks. The average (gray line) was last at this level in 1980. Those old enough can recall that slight inflation was evident at the time. (1980 had inflation of 13.9%.)


    Source: Bianco Research

    Next, Jim presented this chart of the CRB Raw Industrials Spot Price Index.

    This index includes copper and several other commodities for which there are no futures markets: steel scrap, tallow, burlap, printing fabric, etc.

    These are pretty important to some key industries – and their prices are going up.


    Source: Bianco Research

    High-quality copper, hot-rolled strip steel and sawn timber are on the rise.


    Source: Bianco Research


    Source: Bianco Research

    To be fair, much of that price inflation was due to production closings during the pandemic.

    Lumber has been retreating from its heights lately as there is more supply online and high prices discouraging some buyers. Because of this, the Federal Reserve believes that inflation will be “temporary”.

    To some extent, the Fed is right. But not completely, and certainly not in the other elements of inflation.


    Source: Business Insider

    Jim summarized his point of view as follows:

    A third of everyone’s income is now being sent to them by the government. Everyone is crammed with money. They buy things like crazy. The supply chain cannot keep up. It’s not a problem from COVID, semiconductors.

    Look, the head of Intel said the semiconductor supply chain is going to be a problem for two years. There is a simple solution to the supply chain. Load up more money; this is called inflation. What they have done now is not the status, they rationed the product, delivery times are at a 70 year high, but I think the next step is they ask for more money and we will get inflation …

    But I have a feeling that once the base effect is over, we will find that those price increases will persist. People will be comfortable raising prices, loosening the anchoring, and then we will have something we haven’t seen in a long time and that is inflation.

    You have to be pretty much over 50, probably over 60, to be able to remember inflation firsthand. It was so long ago. But what I’m trying to show is that almost every yardstick says inflation is coming back – with a vengeance.

    Note: When Jim says “unanchor”, it is an economic term. Prices over time tend to be “anchored” at previous prices.

    When prices in general loosen up, inflation occurs.

    We are already seeing an inflationary heartbeat. The question now arises, by how much this pulse accelerates.

    I predict an unprecedented crisis that will lead to the greatest loss of wealth in history. And most investors are unaware of the pressure that is building up. Find out more here.

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