If your gas or grocery bill is higher, it doesn’t matter to central bankers. What they dread is a wage-price spiral. That’s a fancy way of saying they don’t care about inflation as long as it doesn’t mean higher wages. If prices rise without corresponding demands for higher wages, it’s a finite move — consumers will eventually have no more money to spend. If wages rise along with prices the cycle can be endless and they need to halt it.
The thing that inflation bugs miss is that wages aren’t rising, in many cases they’re going to other way. MarketWatch profiles American Axle as a symptom of the Michigan manufacturing industry.
Base pay for new hires at Axle in Three Rivers is $10.50 per hour, half the going rate of 10 years ago.
Does that sound like inflation? The story also talks about ‘huge turnout’ at a company job fair for those positions.
The most misunderstood phenomenon in macro economics in the past decade has been deflation
It’s a story that has been missed by almost everyone.
In short: Moving manufacturing and has allowed companies to reap tremendous profits but consumer prices have been sticky. As a result, a bubble in retail square footage has formed. Over time, it will slowly correct as companies compete for consumer dollars. It’s the great unseen long-term trend in developed economies.
Don’t believe me? Visit a dollar store and marvel at the quantity, quality and complexity of the things you can buy there. In addition, realize that dollar store margins are around 32%, meaning it’s only costing the company 68-cents to get those items on the shelves.
Today’s evidence the trend to lower prices is accelerating: A UK 99-pence store has just cut its prices to 97-pence.
On Thursday, US CPI is expected to fall to 1.3% y/y — the lowest since 2010.
My belief that we are in a long-term cycle of disinflation and deflation is one of the things that sets me apart. I have written about this theme frequently and wanted to preserve some of my commentary here. This was originally published Dec 5, 2012 at ForexLive.
The US has a massive oversupply of retail floor space.
The US has 23 sq feet per capita of retail space (but as much as 46.6 sq feet). It’s difficult to come by reliable numbers, but that compares to 14 sq feet in Canada, 6.5 sq feet in Australia, 2.3 sq feet in France and 1.1 sq feet in Italy.
It’s no coincidence that the spike in retail floor space coincided with the rise of cheap imports. The US has embraced globalization more than anywhere else.
The retail pharmacy business perfectly illustrates the change.
A pharmacy used to be a little shop that dispensed prescriptions. They have grown to 20,000 sq foot (1900 sq m) stores where you can get anything.
Conventional wisdom says get people into the store and you can sell them anything but there is more to it. It’s about margins. Cheap Chinese goods have made retail margins incredibly attractive.
Goods that once cost $4 to manufacture and sold for $10 now cost $0.50 to manufacture and still selling for $10. The rise in retail square footage has been all about ripping off consumers who have been slow to adjust.
This is part one of a series. In part two I will talk about how the coming years will be payback time and the enormous ramifications for the economy.