Last week saw a hefty spike in interest rates. In particular, the 10 Year Bond got slammed, as rates climbed to 4.684%, levels not seen since June 2004.

As we have discussed previously, we believe that ongoing inflation will be the key to the Fed, housing, the consumer, and therefore how equity markets will perform. The great irony of this is that most Wall Street economists do not see the inflation we do. Their focus has been on the core rate (ex food and energy). They also ignore the oddities of how CPI is computed, which tends to dramatically understate actual price increases.

Indeed, Economists may be the last people you should ask about real inflation. Sure, if you have a question about the Boskin PCE deflator, well then sure, any old dismal scientist will be your go-to-guy. But if you want the straight dope on inflation as it exists in the real world, you are much better off asking a housewife or a business owner.

So that’s exactly what we did:

Over the weekend, we spoke to numerous business owners. What they told us is very consistent with an economy that has reflated, and whose prices across a broad spectrum of areas have increased.

The broadest overview came from Thomas’s Ham & Eggery, a well konw Long Island breakfast joint (Carle Place ) that has been in business at the same place for over 33 years. If you go there on weekends, you better get there early, ‘cause by 8:30 there is a line out the door.

The menu prices had risen modestly since my last visit, so I spoke with Tom. He usually changes up the menu every now and again, but informed me that “this was the first purely price based menu change” he’s ever done. We discussed the factors driving the increase, and its exactly the sort of broad based inflation you would imagine:

-Electricity costs significantly more than 12 months ago;
-Food prices have risen (although not sharply);
-Sugar is noticeably higher;
-Energy Surcharges are showing up on all deliveries;
-Paper goods are up significantly;
-Insurance costs are rising 11-15% per year;
-Material products are also higher;
    (aluminum foil, styrofoam, wax paper etc.)
- Rent increase on the next lease renewal is a concern;
-Wages have remained stable throughout.

All the concerns we heard at Thomas’s were repeated by other merchants and entrepreneurs. And while we are well aware of the dangers of anecdotal evidence, we are just as concerned with the opposite: an over reliance on economic modeling which claims there is little or no inflation, despite a plethora of evidence to the contrary.

Our advice to the Dismal Set:  Economists need to get out from under the fluorescent glow, and experience real world firsthand. If they did, they would experience price increases and understand why we expect more Rate Increases, even beyond the upcoming FOMC meeting.

Category: Commodities, Consumer Spending, Federal Reserve, Inflation, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

20 Responses to “Thomas’s Ham & Eggery Guide to Inflation”

  1. D. says:

    Housing has doubled in record time but there’s no inflation! In fact, it’s the same story with everything that has been sold on a monthly payment basis. Thanks to falling rates, there has been no inflation! Who cares about the end price? It’s the monthly payment that counts!

    The ones who paid cash should have felt the inflation but it wasn’t too painful because the value of their assets went up too, easing the pinch!

    But rates can’t drop by much more so inflation is going to start rearing its ugly head. It will be interesting to see how creative our leaders will be when dealing with this new reality!

  2. me says:

    “Economists need to get out from under the fluorescent glow, and experience real world firsthand. If they did, they would experience price increases and understand why we expect more Rate Increases, even beyond the upcoming FOMC meeting.”

    And the Fed manages “expectations” of inflation. Now is this guy thinking there is no inflation or is he thinking I have to raise my prices to stay in business?

  3. joe says:

    CL&P rates bumped up 22% last month…That’s probably an extra $600.00-$1000.00 per year out of the pockets of every household in Fairfield County…

    Doubt it matters much.

    Haha.

  4. Idaho_Spud says:

    Anecdotal or not, your post is *real*, not some fuzzy math.

    I’ll take your anecdote over a hedonically upward-adjusted feel-good number that specifically excludes anything that might show something other than low inflation.

    That’s because your anecdote reflects my economic more closely than the “always low” ‘core’ number that the financial press man-cows gleefully report each month.

  5. Bynocerus says:

    My favorite pizza joint in town recently raised the price of its buffet by 50%. They went as far as putting a sngle spaced full paged type sign at the door explaining their decision. The main culprits behind the price hike? Utilities and transportation-related surcharges. This was the most significant change I’ve seen, but it occurred to me that a lot of other restaurants I dine at have been slowly raising their prices for several years. The same thing has happened at the grocery store. In fact, the only place where prices haven’t gone up is McDonald’s, which makes me wonder; will the fed use a fast-food deflator in the future when looking at substitution for food prices?

  6. Michael C. says:

    What inflation?

    I just went to Wal-Mart to buy some cheap plastic 50 cent toys Made in China, and they have only gotten cheaper!

    What inflation? Deflation I say!?!

    Oops, after accounting for gas, I spent more YOY.

  7. GRL says:

    If you read between the lines of Bernanke’s Feb. 24 speech on “Price Stability,” it becomes clear that the purpose of the “core inflation” statistic is not to measure inflation. Rather it is to make sure that inflation expectations remain “well-anchored,” an exercise in psychological manipulation to prevent future inflation.

    I accept that the Fed’s purpose for the deceit is legitimate, and it is totally apart from whatever polically motivated manipulation of the statistics the other branches of government engage in to promote the political fortunes of whoever is in power. (This is not a criticism specifically of Bush; they all do it.)

    But, you are correct, economists, especially on Wall Street, need to be aware of how the government gooses the statistics to come out the way they want them to. And, I think they are starting to do so. When it becomes the conventional wisdom that government statistics understate inflation and overstate economic growth and that the true rates are more like 8% inflation and 12% unemployment, as this economist argues
    (http://www.weedenco.com/welling/Downloads/2006/0804welling022106.pdf)
    all I can say for the financial markets is, “watch out below!”

    No, if you want to get a real sense of what inflation is like, go to your local supermarket (for California, that would be Ralphs, Vons or Albertsons, or, for a real inflationary shocker, Whole Foods) and do a price comparison for the same items over time.

    Do it and post the results; I am sure your readers would love to see what you come up with.

    I do the shopping for our household, and I would say that prices on processed food items (not produce, which does in fact fluctuate, depending on what is in season) go up about 10-20% a year, year in and year out.

  8. royce says:

    I use the weekly cricket measurement. Every week I have to go in and buy crickets for my kid’s frog. The price has been 99 cents a dozen for years now. So at least in one small sector of the economy (insect production), we’re not seeing any inflation.

  9. Jean-Philippe Stijns says:

    “If they did, they would experience price increases and understand why we expect more Rate Increases, even beyond the upcoming FOMC meeting.”

    Then again, M3 is about to go off the screens…

  10. JWC says:

    I go to the grocery store week after week, and see the bill go up for a family of two adults. I always watch for the end of season sales for clothes – this year, even with huge discounts, the prices were higher.

    A gallon of gas for the car has gone up 20 cents in the last week. I’m sure it will drop again, and then bounce up again, but each time it bounces a little higher.

    I don’t know how families with children are managing.

  11. D. says:

    “I don’t know how families with children are managing.”

    They’ve been doing fine. In fact, many mothers have been staying home thanks to house appreciation which has been netting many families more than a double income.

    Since many have been paying with home equity and real estate is flattening, something tells me the sting is only now about to be felt.

  12. todd says:

    The “ridonkulous” focus on core CPI is allowing me plenty of time to accumulate some large homebuilder shorts, though! The day Wall Street acknowledges runaway inflation will be my payday. Yesterday’s bond sell-off was a start… and homebuilders down 5% today!!!

  13. muckdog says:

    Well… Folks are probably spending more dollars on energy, which acts like a tax on them and thus reduces their spending on retail goods and services. Tax hikes aren’t inflationary. Neither are hikes in energy prices. It reduces demand.

    I think this shows up at the retail level, as supplies increase. I just bought a stack of “name brand” summer shorts for $9 each. I’d swear these things were over $25 each back in the 90′s.

    I spent $4000 on a TV last year, and now they’re selling for $2000. Man, $2000 of beer money down the drain…

  14. Steve Bowles says:

    Anecdotal evidence is getting interesting. Sure its in the UK, but just back from a parents afternoon of very middleclass people (Doctors, lawyers, even full time traders like me). The main topic of conversation is how people are noticing a major jump in living costs. In the last few months people have started to see that with current prices/inflation they are living beyond their means. EVERYBODy there is now looking at ways to cut costs. Sure only anecdotal, but I found it relly revealing.

  15. Fred says:

    Things you might want are going down in price while things you really need are going up. I am concerned about inflation in the things I really need; food, energy, housing, health caare, and insurance. If you got a great deal on a cheap TV, good for you. I left you one.

  16. Dru Nelson says:

    C’mon, didn’t everybody here get a 50% raise in their salary last couple of years? :-)

    I think GRL’s comment above nails it.

  17. Joseph Sabino says:

    Gas has basically been flat for about three months now and with winter
    ending oil will stay low. Especially with OPEC’s announcement tomorrow.

    Sugars increase is a brief psychological bounce from the ethanol over
    exuberance.

    And rent well I think we all know what’s going on with housing nowadays.

    Is inflation real… of course. Is it going to stop the S & P from gaining 10% this year… I seriously doubt it. Talk to me about it next year.

  18. cm says:

    GRL: Add Safeway, which owns Vons. I’d say 20% is an exaggeration, and it’s more on the 10% side. But then I do most of my regular shopping elsewhere, so I cannot claim a representative view.

    I have seen substantial price hikes in Trader Joe’s as well last year, mostly for foreign products (e.g. European beer and cheese).

  19. DED says:

    Fred hit it. All the nice and shiny toys are coming down in price but the practical things we need are going up: health insurance, food, electricity. Throw college tuition, gas prices, and property taxes in there too for good measure. Why property taxes? Well, in my town they’ve gone up an average of 5%/year for the last 6 years.

  20. balance says:

    So if shiny toys we like are coming down in price and things we need are going up, where does that leave us? Maybe at a pretty moderate overall rate of inflation. Those on the low end are likely feeling it a bit as their expenditures will typically be more on your staples, but in general most in the U.S. spend a pretty fair portion of their dosposable income on these “shiny” things as well as staples.