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Cost-push Inflation, Demand-pull Inflation, or Something Else?

Earlier today, Procter & Gamble Co. (PG) announced they will increase prices for their consumer products such as baby products, diapers, razors, and detergent. They blame these price increases on rising commodity costs. The last time we witnessed big consumer products companies raising prices was during 2018 when pulp prices drove up the price of diapers, toilet paper, and other paper-related products.


The disruptions in global supply chains, the February freeze triggering mass blackouts in Texas, higher shipping costs, rebounding economy, and the increase in demand for commodities, in general, have many fretting a surge in inflation later in the year.

The term inflation refers to the rise in the prices of most goods and services such as food, clothing, consumer staples, housing, energy, etc. With large consumer products companies like PG and KMB announcing price hikes for their products, does this imply inflation is around the corner?


From a technical perspective, there are some signs to suggest rising inflation. Commodities have rebounded strongly from their respective lows, and some have skyrocketed to record highs.


For instance, Copper has gone crazy over the past year, as it is trading within striking distance of its all-time highs at 4.65. Doctor Copper's remarkable price surge is important, as it is a proxy for the health of the global economy. Strong demand from countries like China, emerging markets, and developed economies hint at a firmer global economy. Freeport-McMoRan (FCX), one of the better Copper plays, is nearing its 2008/2010 record highs of 48.46 and 48.72, respectively.


Lumber prices have also surged through the roof over the past couple of weeks. Lumber futures recorded a high of 1,247.09 on 4/20/21 or tripling in value in the past year alone. The demand for new homes shows no signs of wavering. The supply shortage in engineered wood products used in new construction continues to build into the spring/summer months. iShares US Home Construction ETF (ITB) continues to trade at record territory, as evidenced by the new highs from leadership home builders such as PulteGroup, Inc. (PHM) and DR Horton Inc. (DHI). Within the paper and lumber sector, International Paper Co. (IP) is closing in on its prior all-time high of 57.83 (1/29/18). Weyerhaeuser Co. (WY) has already cleared above its 2018 high of 34.81.


Aluminum and steel are also climbing higher, as evidenced by the Dow Jones Aluminum Index (DJUSAL) surging from 16.48 (3/23/20) to a recent high of 124.76 (4/19/21) and Dow Jones Steel Index (DJUSST) recording 10-year highs of 328.39 (3/29/21). Alcoa Corp. (AA) has recovered sharply from its March 2020 bottom (5.16), as it has appreciated sevenfold to 36.53 (4/19/21). Nucor Corp. (NUE) has broken out to all-time highs above 64 or the top of a massive 13-year technical base.


With the above commodities and many other commodity-based indexes skyrocketing in the past year, the question is this trend transient or is this sustainable and longer-term. There remain various factors that drive prices higher, triggering real inflation in an economy. The most common is an increase in production costs or an increase in demand for products and services.


Cost-push inflation occurs as the result of price increases due to increases in production costs, namely raw materials, and wages. The demand for goods remains mostly unchanged, but the supply of goods declines due to the higher cost of production. Cost-push inflation often occurs when key production inputs such as oil and metals rise dramatically. The businesses that use these production inputs pass on the higher costs of raw materials to the end-users. Changes in wages can also affect the cost of production, as it is often the largest expense for most businesses. If the companies raise employee wages, then this can also lead to cost-push inflation.


Demand-pull inflation typically occurs when there is strong consumer demand for products and services. When there is a surge in demand for goods across an economy, this can lead to prices increasing, resulting in demand-pull inflation. Economic expansions, strong business recoveries, and pent-up demands can overwhelm supply. Strong consumer confidence and high consumer spending, all of which can lead to an increase in demand for products and services.


Other less common factors leading to rising inflation comes from some scenarios as an unusually strong housing market, expansionary fiscal policy, and easy monetary policies from the central banks. All the stimulations can increase demand for goods and services, leading to price increases and hence rising inflation.


In summary, will cost-push inflation, demand-pull inflation, or the massive fiscal stimulus programs and easy money from the Federal Reserve led to inflation. The last time the US witnessed real, sustainable high inflation was during 1965-1982. It was a period commonly to as the Great Inflation. The 1965-1982 period caused significant damages to the US economy and other economies around the world. The US stock market traded sideways for nearly 17-years.


Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

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