Higher Prices? Thank China
China's insatiable hunger for raw goods is starting to sting U.S. consumers
But manufacturers are keenly aware that customers have not seen inflation in durable goods for years, says David MacGregor, an analyst with Longbow Research in Cleveland. Behind the scenes, he says, some makers of washing machines, refrigerators, and other appliances have begun talking higher prices, but retailers are resisting. "Nobody wants to flow it through to the consumer yet," says MacGregor. General Electric has said it hopes that productivity gains will help it avoid heftier price tags.
Because so many manufacturers can similarly make up for high raw materials costs by cutting jobs, slashing pay, and demanding more out of the labor force, analysts at Merrill Lynch recently concluded that "inflation will remain benign" despite the commodities upswing. In stark contrast to the inflationary 1970s, they point out, today only 10 percent of the U.S. workforce is unionized, the lowest percentage in the post-World War II era. And the interest rate gurus agree. In January, while divided on the direction of inflation, the Federal Reserve open market committee opted to keep interest rates low. The consensus was that productivity gains and high unemployment would offset the risk of inflation.
Still, it's hard to believe that China's voracious appetite won't seriously affect the No. 1 consumer nation. With oil, where pump prices move in step with the price of crude oil, consumers already are feeling the impact of China's 30 percent growth in demand last year (it's now the world's No. 2 consumer of petroleum). Whether or not the Organization of Petroleum Exporting Countries holds to the production cuts it made last week, worldwide demand for oil will continue to increase thanks to China, pushing up the cost of all manufacturing and transportation.
Then there's food. China is expanding its livestock herds to meet its citizens' demands for more meat. As a result, the Middle Kingdom has dramatically increased its imports of soybeans, a prime component of cattle feed. China is expected to import 25 million tons of soybeans this year, a 14 percent increase over last year. Soybean prices in the United States, in turn, rose to their highest level in 15 years. Also, while China had been a minor player in the U.S. wheat market, buying just 78,800 metric tons a year ago, over the past year, that figure has ballooned to 1.4 million metric tons. Leading cereal maker Kellogg said last week it is feeling pressure from the grain market and is considering price hikes.
Skinny cows. Most analysts say that domestic food tabs will be only modestly goosed by the run-up in grain. O'Neill of LOGIC Advisors points out that wheat is 5 to 7 percent of the cost of a loaf of bread, so consumers would hardly notice even a significant pass-along in grain cost. Ron Lawson, also of LOGIC Advisors, says that if soybeans become too expensive for U.S. ranchers, they will simply send leaner cattle to market, with little impact on grocery shoppers. "We have so much room to be more efficient that even if raw materials go up at the processor end, the competition that exists today will keep end-user inflation at a minimum," Lawson says.
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