AN iconic television commercial from the 1970s shows Mother Nature in a gown of white, adorned with a crown of daisies, sitting in a flowered forest surrounded by birds and woodland animals. She samples a spread saying, “Oh, that is my delicious butter straight from nature, so creamy and sweet.” The narrator informs her: “That’s Chiffon Margarine, not butter.” “Impossible,” says Mother Nature. The narrator responds that the margarine is indeed so close to real butter that it could fool even Mother Nature.
Suddenly her face turns menacing, and she responds. “It’s not nice to fool Mother Nature!” She waves her hand, and the forest turns into an empty wasteland. Black thunderclouds fill the sky and huge bolts of lightning crash all around.
Two days ago, data showed the US Producer Price Index increased by 9.6 percent year over year in November, much higher than expected and the highest increase on record. Obviously, prices are increasing at an astounding rate, but that is not the point why I mentioned this data.
The “book” definition of the PPI is “the average changes in prices received by domestic producers for their output.” The financial talking heads trying to shield the public from disastrous government economic policies may say that the PPI does not matter anymore. “Producers” imply “manufacturers” and the US buys all their factory-made stuff from China. Nothing to see here, folks. Move along.
However, they are trying to fool the people. The goods and services in the PPI include the entire marketed output of US “producers” of raw materials (like wood and cement), finished goods (like furniture and swimming pools), and services (like carpenters and concrete masons). This includes goods, services, and commodities purchased by other producers as inputs to their operations, or as goods and services purchased by consumers either directly from the service producer or indirectly from a retailer.
Inflation as measured by the “Consumer Price Index” is based on a basket of goods and services that an ordinary person regularly buys such as clothes, cars, appliances, utilities, Netflix, and rent. The price the department store pays for each of a million shirts is different than what we pay. But because a single consumer does not buy a million shirts every day, the department store sells those shirts to several million consumers over many days or weeks.
After reading the PPI number, a US consumer might go to the department store and say, “Well I don’t see any price increase since the last time I was here.” But the “Mother Nature” of the markets will not be fooled by the talking heads. Over the next months, the price of that shirt will be much higher.
The Federal Reserve can only try to fool “Mother Nature” with artificially low interest rates that taste so creamy and sweet just like genuine economic growth for so long. The Fed can fool the consumer with what was formerly “transitory inflation,” which is now a “flexible average inflation target.” Eventually, though, the market can turn the delightful forest into a dead wilderness.
“Chilean policy-makers seek to rein in a consumer spending boom and the fastest inflation in more than a decade. Chile’s central bank lifted its monetary policy interest rate by 125 basis points to 4 percent.” Even that is fake butter. The reality is that the cost of borrowing money in Chile just increased by 45 percent. Or will. The monetary policy interest rate is like the PPI and the consumer will get whacked by the borrowing “price” increase down the line.
Relax. Philippine interest rates will always be realistic because our economic policy-makers are not political no matter what the academic economists along with their “opposition” think tanks might say. Further, while the US may try to “export” its inflation, the Philippines is not dependent on Uncle Sam’s children for our economic growth.
E-mail me at mangun@gmail.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis provided by AAA Southeast Equities Inc.