Pay The Piper

Pay The Piper

Some of the inflation banter emanating from prominent market participants can properly be written off as fearmongering, attention-seeking or just an inability to resist the temptation to deride the Fed.

After all, it’s not like Jeff Gundlach (who suggested this week that price pressures may not be as “transitory” as the Fed thinks) cares how much a loaf of bread costs. Jeff probably thinks apples are $12 each. Same goes for Paul Singer (earlier this year, Singer warned of a “tremendous” inflation surprise).

While I’ve variously insisted (and will continue to insist) that broad-based, runaway inflation isn’t coming to the United States (or any other developed economy for that matter), the situation is obviously more perilous for emerging markets. On top of that, there will clearly be pockets of price pressure as supply-demand imbalances work themselves out.

The problem is that “pockets” of price pressure don’t really exist in a vacuum, something underscored in a short Bloomberg piece out Thursday. You can read it at your leisure, but the most important takeaway is summed up in just one sentence.

“A gauge of grain prices is at an eight-year high, boosting the cost of feeding animals and signaling higher meat prices could be coming for consumers,” Isis Almeida, Michael Hirtzer and Kim Chipman wrote. That captures a very simple dynamic: The more it costs to feed the animals, the more it will eventually cost you to eat them.

The same article notes that surging prices are actually rerouting trade, as producers venture out for better prices or alternatives. In some cases, animals’ diets are being altered.

A key theme in these pages over the last several months has been the extent to which rising global food prices pose a serious risk to emerging markets and especially low-income countries, which have enough on their plates amid the pandemic without having to worry about… well, without having to worry about the cost of putting things on their plates.

Beyond rising food costs, other commodity prices are rising inexorably. Copper, for example, hit $10,000 per metric ton on Thursday, and is approaching a record high set more than a decade ago (figure below).

One analyst called $10,190 (the all-time high) a “foregone conclusion.”

For many, the above is just further evidence to suggest that persistently higher prices for a range of goods are also a “foregone conclusion.”

Demand is strong and should accelerate further as the global recovery gathers momentum. “Bottlenecks” (as Jerome Powell described various supply chain issues on Wednesday) suggest supply-demand will remain out of balance for the foreseeable future.

That nods to a bit of embedded irony (and I can always find irony embedded somewhere). Fiscal stimulus in the US is aimed specifically at improving the plight of America’s middle class in part by spending huge sums on infrastructure and clean energy initiatives, programs which the Biden administration (correctly) says will provide good-paying jobs.

That infrastructure push is part of the rationale for copper’s rapid ascent. But, because we persist in the fantasy that fiscal spending in advanced economies must be “paid for,” the attendant borrowing binge necessitates Fed largesse in order to keep a lid on yields (i.e., to keep the cost of “debt” affordable). The same kind of Fed largesse was blamed for surging food prices a decade ago, when societal unrest rippled across the Mideast.

Read more:

Feast, Famine And The Fed

‘A Surge In Global Food Prices Could Trigger Social Unrest Everywhere,’ Albert Edwards Warns

So, one side effect of Biden’s proposal to improve the economic plight of America’s lower- and middle-income households and resurrect domestic manufacturing, is surging prices for everything from metals to grains.

Those who fault globalization for the declining prospects of America’s middle class might suggest this is only “right.” Pulling countless millions out of abject poverty around the globe has been variously blamed for the hollowing out of many an American manufacturing town. Now, in order to “build back better,” some of those countless millions may need to pay up for food.

The question for those in developed economies is whether and to what extent it all boomerangs back home. Most families in advanced economies can afford a small percentage increase in the cost of things like bread and meat. But a larger increase could eat into (no pun intended) the benefits associated with any new jobs Biden’s fiscal plans manage to create.

And when it comes to emerging markets and the prospect of societal unrest in locales where rising food costs can mean severe economic distress, it’s important to remember that what happens abroad never stays “over there,” so to speak. Trump said “America first.” Janet Yellen said “America First [but] never America alone.” I’m not sure the second is much different from the first, other than the perfunctory nod to decorum.


2 thoughts on “Pay The Piper

  1. Prices of many commodities are up due to the economy bouncing back. The alternatives are worse. Emerging market countries would be wise to provide aid to support incomes if at all possible- not subsidize scarce commodities- that always backfires by defeating price signals. Developed countries would be wise to help in that endeavor. In the meantime, higher prices will eventually cause commodity production to increase- agricultural commodities are usually faster than say copper (mines take years to develop). We have seen this movie before. Targeted smart aid will help, poorly designed aid usually does not.

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