February 9, 2023

Consumer goods company Unilever—which makes pretty much everything you buy that is packaged at the grocery store—has said that its prices will continue to increase even as inflation levels off.

Prices for its goods rose 13% over the last few months of 2022.

This provides a bit of an indication that while "inflation" will be leveling off, the price increases that regular working people face will continue to increase.

Food costs are a large part of Unilever's prices as they take low-quality food stuffs and make packaged goods out of them that need less refrigeration. The rest of its products are household chemicals.

The margins on all these items is small, so increases in prices are usually linked directly to input costs. And, since it is a global company and wages have not been increasing most places it produces, the prices are directly linked to the material input costs.

When we talk about "inflation" it is still important to pull out specific prices and ask "what is the reason for change in prices".

And, before you blame "excess profits" or monopoly, profits are down for the company in 2022.

underlying operating margin declining 230 basis points to 16.1 per cent. It pushed up brand and marketing investment by €500mn as the squeeze on consumers’ wallets caused tougher competition between brands. (FT)

While we all might point out that its profitability is still too high, the fact that it fell in 2022 should make you question the notion of prices increase because companies decided to make more.

FT's Unhedged links to a (familiar) analysis of the financial trickery the Federal Reserve has used since 2008 and its impacts on the economy:

• Better markets

It is along the lines of what we have been talking about since 2009: suppression of interest rates to provide a profit subsidy to banks is not sustainable in the long run. And, we are facing the impacts of this profit subsidy now.

Essentially, it is the reality will reassert itself eventually argument.

The paper does miss some of the other parts that we talk about when we point to inflation. The "cheap debt" leading to money printing and bad loans is only half the story. But, it is fun to see liberals can even get this at times. Although, it is mostly based on the idea that the Fed can affect inflation in both directions.

Beyond research reports, investors also agree.

Seth Klarman has told investors in his hedge fund that the Federal Reserve’s response to the 2008 financial crisis and the ensuing decade-plus of low interest rates had helped “erect a financial fantasyland”.

“A consequence-free era of virtually unlimited low-cost capital had come to an end,” Klarman, the head of Baupost Group and a prominent figure in investing, declared in a year-end letter to clients seen by the Financial Times. “A boom based on easy-money policies will inevitably contain the seeds of its own destruction.”

This does bring us to the question of what the correct response to the 2008 financial crisis would have been.

That, of course, is direct public-supported production.

Disney has announced layoffs today following other technology-heavy companies over the previous few weeks. At this point, there are 100s of thousands of technology workers who have been pushed out of companies.

The popping sound of the bubble in tech employment is part of the consequences of hiring during the pandemic. Free money and a massive shift in technological uses during the pandemic increased employment in these firms.

Kind of the same way that building a railroad or new town will increase the number of workers during the build, but those workers will be out of a job when the building is finished.

The infrastructure to support and supply these new services has been built, the free money train has derailed, and the needed work has dried-up.

That does not mean these tech companies are doing poorly. They have laid-off workers—carefully selecting the lower-productivity individuals—and have become more productive and likely more profitable. Until new competitive environments emerge.

And, they have. Just as tech companies were laying people off, a brand new market has emerged to shake things up: AI-driven chat bots like ChatGPT, Bard, among others.

These new tools for getting a response from a computer are going to drive much of the competition and development of how we use technology for the next few years if not decades.

A briefing note on the political economy of these bots will be arriving for you in the near future. And, I promise it will be one that ChatGPT will not be able to write.