From one of Rosenberg's recent letters regarding 70s vs 2000s, commodity prices and inflation pass through:
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LACK OF PASS-THROUGH FROM THE COMMODITY RUSH TO FINAL CONSUMER PRICES
There seems to be quite a bit of concern that inflation is going to rear its ugly head now that commodity prices have bounced back so sharply. Well, I went back to the other five major commodity bull markets back to the early 1970s and compared the run-up in the CRB index to the surge in the CPI to get a gauge as to how much âpass-throughâ there was into final-stage consumer pricing. Historically, there is a 37% pass-through, averaging out those cycles. In other words, for every 10% increase in the CRB, 3.7% of that advance found its way to the U.S. consumer.
But in the 2002-2007 cycle, a 118% surge in commodity prices only managed to translate into a 21% increase in the CPI â for an 18% pass-through. That was the smallest spill-over ever from the commodity sector to the consumer â half of what we usually see (in the second half of the 1970s, by way of comparison, the passâthrough was 83%!). Also keep in mind that in the 2002-07 cycle we had a booming leveraged U.S. economy, which took the unemployment rate down to 4.4% at the low (versus 9.4% now) and industry capacity utilization (CAPU) rates up to 81% (versus 69% now). The story was that even with the drop in the unemployment rate and rise in the CAPU rate, the output gap in the U.S.A. never fully closed in the last expansion â the Fed never allowed the economy to breach its full capacity limit (closer to 4.0% unemployment rate and 82% CAPU) which made it very difficult for final stage manufacturers and retailers to pass on much of the surge in raw material costs.
We now have a one-trick pony when it comes to the commodity story and it is Chinese demand. While the U.S. economy did manage to expand on the back of soaring housing wealth and surging credit growth from 2002-07, it played a secondary role in the bull market in resource prices. So from my lens, if U.S. retailers had difficulty passing along commodity costs in the last cycle when credit was abundant, I fail to see how they are going to do so in the current and prospective environment of declining household credit growth, rising savings rates and near-record excess capacity in the product and labour market.
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LACK OF PASS-THROUGH FROM THE COMMODITY RUSH TO FINAL CONSUMER PRICES
There seems to be quite a bit of concern that inflation is going to rear its ugly head now that commodity prices have bounced back so sharply. Well, I went back to the other five major commodity bull markets back to the early 1970s and compared the run-up in the CRB index to the surge in the CPI to get a gauge as to how much âpass-throughâ there was into final-stage consumer pricing. Historically, there is a 37% pass-through, averaging out those cycles. In other words, for every 10% increase in the CRB, 3.7% of that advance found its way to the U.S. consumer.
But in the 2002-2007 cycle, a 118% surge in commodity prices only managed to translate into a 21% increase in the CPI â for an 18% pass-through. That was the smallest spill-over ever from the commodity sector to the consumer â half of what we usually see (in the second half of the 1970s, by way of comparison, the passâthrough was 83%!). Also keep in mind that in the 2002-07 cycle we had a booming leveraged U.S. economy, which took the unemployment rate down to 4.4% at the low (versus 9.4% now) and industry capacity utilization (CAPU) rates up to 81% (versus 69% now). The story was that even with the drop in the unemployment rate and rise in the CAPU rate, the output gap in the U.S.A. never fully closed in the last expansion â the Fed never allowed the economy to breach its full capacity limit (closer to 4.0% unemployment rate and 82% CAPU) which made it very difficult for final stage manufacturers and retailers to pass on much of the surge in raw material costs.
We now have a one-trick pony when it comes to the commodity story and it is Chinese demand. While the U.S. economy did manage to expand on the back of soaring housing wealth and surging credit growth from 2002-07, it played a secondary role in the bull market in resource prices. So from my lens, if U.S. retailers had difficulty passing along commodity costs in the last cycle when credit was abundant, I fail to see how they are going to do so in the current and prospective environment of declining household credit growth, rising savings rates and near-record excess capacity in the product and labour market.
