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The Slippery Slope of Inflation

Graham Summers

Posted May 03, 2021

Graham Summers

It’s official… inflation is now deeply embedded in the financial system.

If you’re not yet seeing rising prices where you buy things, it’s because inflation operates on a slippery slope…

You see, inflation arrives in stages. It’s not as though it appears overnight and suddenly the cost of everything rises.

Instead, inflation slowly works its way into the financial system in phases.

  1. Phase 1: Raw materials
  2. Phase 2: Factory gate prices
  3. Phase 3: Retail prices

The first stage occurs in the manufacturing segment of the economy when producers are suddenly paying more for the raw goods and commodities they use to make finished goods.

We first hit this stage several months ago as the chart below illustrates. The price of raw materials such as copper, lumber and even gasoline are all up triple digits in the last 12 months.

chart, inflation hits maufacturers costs

Now, one or two months of higher commodities or raw goods is no big deal, but once you're talking 6 to 8 months of steadily rising prices it's significant. At that point manufacturers are forced to start raising the prices of finished goods, or face shrinking profit margins.

This is when you see the next phase of price hikes.

Factory Gate Price Increases

You see, in today’s economy the company that makes something is rarely the one that sells it to the public. Instead, manufacturers first sell their goods to retailers or distributors, who then sell the goods to the public.

The prices that producers charge distributors are called “factory gate prices” (the prices the goods cost as they leave the factory). And according to the Chicago Business Barometer, factory gate prices just hit a 41-year high.

Put another way, the last time producers were forced to charge this much was in 1980… and that was during one of the worst inflationary storms in history when the Fed was forced to raise rates to over 15%.

Retailers and distributors can stomach these price increases for a time, but eventually they are forced to raise the prices they charge consumers — or go broke.

As the Financial Times noted over the weekend, we are now officially there:

Nestlé, Procter & Gamble and Unilever are among the global groups to have set out plans for price rises in their latest market updates following commodity price jumps and a spike in transport and packaging costs.
Source: Financial Times

These are not isolated instances either as the headlines below reveal. Everyone from Coca-Cola to Costco is being forced to hike prices.

Coca-Cola CEO says company will raise prices to offset higher commodity costs

Kimberly-Clark raises prices on Scott toilet paper, diapers in U.S. and Canada

How Costco Is Masking A 14% Price Jump With Shrinkflation

That last term is key. Companies don’t always simply raise prices. Sometimes they engage in “shrinkflation” the policy of selling less of a product for the same price. You’ve probably noticed that the old 16-ounce bag of frozen vegetables you bought at the grocery store is now a 12-ounce bag.

That’s shrinkflation: less of a good for the same price, means higher prices per unit.

Bottomline: inflation is DEEPLY embedded in our financial system. Will the Fed act to stop it, or are we entering a true inflationary storm in which prices spiral out of control?

I’ll address that in tomorrow’s article. Until then…

Best Regards,

Graham Summers
Editor, Money & Crisis

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