08S7C's Economics Blog

In inflation war, Wal-Mart has front row seat........

At its annual shareholder meeting, Wal-Mart CEO Lee Scott said Americans are struggling with rising food and fuel prices.

By David Goldman

NEW YORK (CNNMoney.com) -- The high cost of food and record fuel prices are limiting consumers' budgets, Wal-Mart executives said Friday at the company's annual meeting with shareholders.

"I wonder if Sam Walton could ever imagine a day where oil was $130 a barrel or milk was $4 a gallon," said Wal-Mart chief executive Lee Scott at the meeting.

Scott said Wal-Mart customers were faced with difficult decisions about choosing how and where to spend their money, as soaring prices have created a difficult environment for the average consumer.

"The biggest problems out there today are the problems our customers face the most," said Scott. "Rising oil and gas prices are squeezing family budgets, and food inflation is making it more difficult for parents to put a good healthy meal on the tables for their children."

As a result of Americans' cramped budgets, the company's executives said consumers have flocked to Wal-Mart stores because the discount retailer offers competitive prices.

"At a time when everyday Americans are struggling with everyday needs, price matters, said Wal-Mart chief executive of U.S. stores, Eduardo Castro-Wright, at Friday's meeting.

Thursday, Wal-Mart reported a 3.9% same-store-sales gain for May, excluding the impact of fuel sales. Same-store sales are recorded from stores open at the same time a year ago.

"Customers continue to rely on Wal-Mart to stretch their dollars," said Castro-Wright in a statement released Thursday. He reported that grocery sales were strong, as well as sales for flatscreen TVs, computers and digital electronics.

Wal-Mart also got a big boost from consumers who spent their economic stimulus checks. Though Scott had said in May that there was potential for a short term impact from stimulus checks, he noted that the company was unsure how much it would benefit from the tax rebates in the long run.

Wal-Mart (WMT, Fortune 500) Chief Financial Officer Tom Schoewe said Thursday that $350 million worth of stimulus checks were cashed at Wal-Mart stores during the month of May, but it was unclear what products customers spent that money on

posted by Desmond @ 6:35 AM 0 Comments

posted by Cassandra Lim @ 6:12 AM 0 Comments

A nice cartoon ...

posted by Desmond @ 7:35 AM 0 Comments

UK producer inflation at record

Manufacturers face rising costs
UK factory gate prices and producers' costs rose at a record pace in April, official figures showed.
The Office for National Statistics said that output prices for sales of manufactured products rose at a rate of 7.5% in the year to April.
Input prices rose 23.3% over the year. Input and output prices are at their highest since records began in 1986.
The data is likely to underscore policymakers' concerns about rising inflation as the economy slows.
Higher food and fuel prices accounted for the rise in input and output prices, along with increases in alcohol and tobacco duties following government tax changes.
The data came as the CBI said that small and medium-sized firms were struggling with high energy and raw material prices.
Retail pressure
The figures show that manufacturers are managing to pass on higher input costs to their customers, says the BBC's economics editor Stephanie Flanders.
However, she adds, the key question for the Bank of England is whether retailers will be able to pass them on to the final consumer - and so far, they have not been able to do so.
Analysts at Capital Economics said the higher cost of goods would not necessarily be passed on to consumers.
"We think that the consumer slowdown will mean that retailers will be forced to absorb the bulk of these cost increases in their margins," said Paul Dales, UK Economist at Capital Economics.
Consumer price index data for April is due to be released on Tuesday.
But Mr Dales added that the cost pressures could make the Bank of England's Monetary Policy Committee (MPC) more cautious on cutting interest rates.
"These data will maintain the MPC's reluctance to cut interest rates any faster."

comments:
In this article, the concepts of government intervention and tax incidence are prevalent. Government intervention is evident from 'government tax changes' which resulted in increase in alcohol and tobacco duties. Price mechanism does fail - instances involving demerit goods like liquor and tobacco. Hence government will intervene and the form in this article is via indirect taxes on goods. It is perceived by suppliers to add to cost of production and hence shift supply curve upwards. To produce the original quantity, they have to fully recoup their tax paid as well, hence they will raise equilibrium price(output prices for sales of manufactured products rost at a rate of 7.5%) and reduce quantity exchanged.
Consumer slowdown will be due to hike in output prices, hence products will be price elastic ie more than proportionate change in demand wrt change in price. Price elasticity of demand will therefore account for greater incidence of taxation on producers(retailers will be forced to absorb the bulk of these cost increases in their margins). Producers will not wish to lose too many customers due to over-increase in price, such that total revenue decreases. Perhaps the nature of manufactured products in the essay is addictive and has many substitutes.
We also need to consider the aim of the government in implementing these taxes. Possibilities are to increase tax revenue/restrict production.

Hui Pei

posted by pea @ 8:32 AM 0 Comments

British Gas bills may rise again

Households could see fuel bills rise again this year
Centrica, the owner of British Gas, has signalled that fuel bills could rise again as its profits are squeezed by higher gas and power prices.
Centrica said it would take "action to deliver reasonable margins".
It warned it may have to take action after wholesale gas prices increased by 92% from a year earlier, and wholesale electricity costs doubled.
Centrica said its profits would be "materially lower" in the first half of 2008 despite British Gas price rises.
In January of this year, British Gas increased gas and electricity bills by an average of 15% in the face of rising wholesale prices.
Price comparison website uSwitch.com said that the average household bill would rise by about 10%, or roughly £105, by late summer, with a further 15%, or £173, hike in January 2009.
"It's pretty clear that something has to give and that household energy prices are going to be shooting up again this year," said Tim Wolfenden, head of home services at uSwitch.com

'Terrible news'
Allan Asher, the chief executive of industry watchdog Energywatch, said that if British Gas raises prices, other suppliers could follow suit.
"Sadly if one company goes ahead and raises prices, others will respond."
"For the fuel poor, it's terrible news," he told BBC News.
In April, French bank Societe Generale said Centrica's residential arm could be loss-making in the first half 2008, unless it raised domestic prices again.
"Today's announcement is likely to put downward pressure on consensus of 2008 estimated earnings per share of 26.2 pence, but this should not come as a surprise to investors given the current commodity price environment," Cazenove analysts said in a note.
Centrica's shares were up 2.7%, or 7.75 pence, at 295.25p in late morning trade in London.

Legal action
Centrica also said it was taking legal action against consulting and technology firm Accenture over the design and implementation of a customer billing system.
British Gas received many customer complaints when the new system was rolled out in 2006 and 2007, it said.

Centrica added that since Accenture left the programme, British Gas had managed to stabilise its customer service and customer complaints to watchdog Energywatch have fallen by 85%.
Accenture has said it met the specifications laid out by Centrica, and that the system was ready on time and within budget.

comments:
Centrica's profits might be lower despite price rises due to increased costs of production (ie. wholesale gas and electricity costs increased) and possible anticipated decrease in consumption of such goods. Perhaps hike in prices might discourage consumers from expending too much resources and hence cut down on usage. Therefore consumer expenditure might decrease and this would lead to decreased total revenue. After deducting relatively high production costs, profits would be lower.
'If British Gas raises prices, other suppliers could follow suit'. We see here several dominant firms of gas and electricity suppliers, which implies oligopoly. There are 2 ways to see the reactions of suppliers: 1. they increase price as well. The rationale would be that these firms are mutually interdependent and hence they have to maintain a relatively close price range of products and services. 2. their price remain as normal. Rationale would be that more consumers would turn to them and their sales would increase, contributing to increased total revenue.
Therefore there could be 2 possible reactions of suppliers.
"For the fuel poor, it's terrible news". It is because increased prices will add strain to their finances and further reduce access to such commodities.
There would be downward pressure on estimated earnings of its market shares as profits would have fallen due to increased costs of wholesale gas and electricity. There is possibility of price drop per share which might result in reduced confidence of investor to buy its shares. Hence company may lose some revenue in the financial sector.

Hui Pei (no idea y my name is pea. but nvm)

posted by pea @ 7:10 AM 0 Comments

Surging food prices bite across Asia

Surging food prices bite across Asia
The Straits Times
11 May, 2008

SYDNEY - FROM the rice paddies of Asia to the wheat fields of Australia, the soaring price of food is breaking the budgets of the poor and raising the spectres of hunger and unrest, experts warn.

A billion people in Asia are seriously affected by the surging costs of daily staples such as rice and bread, the director general of the Asian Development Bank, Mr Rajat Nag, has said.

'This includes roughly about 600 million people who live on just under a dollar a day, which is the definition of poverty, and another 400 million who are just above that borderline,' he said.

Globally, the World Bank last month estimated that 33 countries were threatened with political and social unrest because of the skyrocketing costs of food and energy.

Across Asia, workers made a campaign against high food prices their May Day battle cry last Thursday in marches through cities including the capitals of Indonesia, the Philippines and Thailand.
While the demonstrations were mainly peaceful, concern is growing over the potential for political instability and unrest if high prices persist.

'Once people get hungry they start also getting quite desperate and take desperate measures,' Mr Damien Kingsbury of Australia's Deakin University said.
India's top farm scientist and architect of the 1960s 'Green Revolution', Mr Monkombu Sambasivan Swaminathan, has said India needs a second agricultural revolution to boost food supplies or face huge social turmoil.

Experts blame the high food prices on a confluence of factors, including increased demand from a changing diet in Asia, droughts, the rising use of crops for biofuels, and growing energy and fertiliser costs.

In Australia, which usually ranks second after the United States as a global wheat exporter, several years of drought cut harvests to just 13 million tonnes last year from an average of 22 million tonnes.

So while consumers are struggling, Australian farmers are not getting rich on the backs of the poor, said National Farmers Federation chief executive Ben Fargher.

'It's been the worst drought in our history and many, many farming families are under significant financial and emotional stress and it will take our communities a long time to recover,' he said.

And even in a relatively prosperous country like Australia, people are feeling the squeeze in the supermarkets, prompting the government to launch an inquiry into how to stem rising grocery prices.

Around the rest of the region, the impact varies from traumatic to minimal:

Afghanistan: Millions of Afghans are finding it 'problematic' to meet their basic food needs with prices of the staple, wheat, doubling in some areas over recent months, the World Food Programme has said. About 400 people demonstrated in eastern Afghanistan last month, blocking a key road linking the eastern town of Jalalabad to the capital Kabul and demanding the government step in to control prices at food markets.

Bangladesh: One of the world's poorest nations, Bangladesh has been hit by a doubling in the price of the main staple, rice, in the past year and many low paid workers say they have been forced to make do on only one meal a day. Last month about 20,000 garment workers rioted near the capital Dhaka for higher wages to cover food prices.

Cambodia: Soaring rice prices have forced the World Food Programme to indefinitely suspend a programme supplying free breakfasts to 450,000 poor Cambodian schoolchildren.

China: Chinese Premier Wen Jiabao told a meeting of the State Council last month that high prices were the biggest problem in the domestic economy. 'The inflation is led by food price rises, which especially hurt the poor,' said Mr Ma Qing, a Beijing-based analyst with the CEB monitor group. 'So the pressure (on maintaining social stability) is certainly quite large.' The finance ministry announced a special 100 per cent duty on exports of fertilisers and the raw materials used to make them in order to ensure domestic supply over the ploughing season and 'guarantee this year's grain harvest'.

India: A general strike against spiralling food prices paralysed Kolkata on April 21 as thousands of police were deployed across West Bengal state to stop protests turning violent. New Delhi has already slashed food duties and banned exports of lentils and other staples, and will not hesitate to further 'sacrifice revenues to control prices', Finance Minister Palaniappan Chidambaram said.

Indonesia: Anger over rising food prices was a focus for some 10,000 Indonesians who took to the streets of the capital Jakarta for Labour Day rallies. High prices for rice, cooking oil and soybeans helped drive Indonesia's annual inflation rate to 8.17 per cent in March. Japan: In resource-poor Japan, which relies on imports for 60 percent of its food, companies have hiked prices on everything from beer to beef, mayonnaise and 'miso' paste made from fermented soy beans in recent months. Although Asia's largest economy has been struggling for years to end deflation, rising food and commodity prices have not been welcomed because of the pain they inflict on small businesses and low-income households in particular.

Malaysia: Anger over rising prices was a major factor in March elections which saw the ruling coalition lose a third of parliamentary seats and five states in its worst results in half a century.

Nepal: Nepal last week banned the export of grains as prices soared. 'There is a high possibility of food crisis in a poor country like ours where domestic production is not enough,' said Mr Hari Dahal, a spokesman at the ministry of agriculture.

North Korea: North Korea's food crisis has already seen some people starve to death in remote rural towns, according to an aid group which works in the impoverished communist nation, South Korea's Good Friends organisation. Prices of staple foods have almost tripled over the past year.

Pakistan: Analysts say public anger over food shortages, particularly wheat flour for the staple roti bread, was a factor in the defeat of President Pervez Musharraf's allies in elections in February.

South Korea: Rising rice prices abroad have almost no impact on South Korea, which imports less than five percent of its annual consumption and heavily subsidises its rice farmers.

Singapore: Singapore is the wealthiest economy in South-east Asia but charities say inflation is driving more people to join queues for free meals. Consumer price inflation reached 6.6 per cent in January-February, officials said.

Taiwan: Taiwan is self-sufficient in rice so international prices have no impact. However, domestic rice prices hit a 26-year high earlier this year due to typhoons affecting the harvest.

Thailand: In Thailand, export and domestic rice prices have risen about 50 per cent in a month. Some farmers have taken to arming themselves and staking out their fields at night to protect their precious crop from rice thieves.

In a phrase particularly chilling for Asia, the World Food Programme has described rising food prices as a 'silent tsunami'. -- AFP

posted by kalok the great @ 1:23 AM 0 Comments

Corn prices soar, rice swells as flour holds tight!
Christopher BurnsMonday, October 29, 2007
THE enduring resourcefulness of corn has finally managed to stretch the price of a pound of rice way beyond its swelling capacity, but enough to also cause collateral damage to the ego of "gungo peas", as it jostles for position among fewer grains of the good ole Uncle Ben's.

While, on the other side of the plate, the relationship between corn and wheat has gone so sour that cornmeal dumpling is no longer amused, because its main companion, flour, has been biting the dust on account of the "Bully Rhygin" behaviour of the price of corn, as it takes pride of place in the biofuel industry. For now, rice and flour are hollering for some of the subsidies corn has been receiving, and chickens are no longer merry, because the corn hawks are too near.
Excursus aside, from the statuesque colonial structures of Mexico City to the unforgettable corners of Rome, where the Trevi Fountain occupies pride of place in the square with the same name, consumers are paying, and bracing for, higher prices for corn, corn-based products, rice, wheat, flour-based products - such as bread, buns and biscuits - poultry products, pork and its derivatives, and a host of other basic food items.

There is a combination of factors driving world commodity prices. Chief among these factors are soaring oil prices, higher freight rates, stronger maize price because of the demand for ethanol and decrease in acreages planted due to climatic and other environmental changes in places like Australia. Like other commodities such as wheat, the rice fields of Asia are in danger from extreme weather.

In Indonesia, for example, production may fall short of demand because of El Nino weather conditions which hurt rice crops. Price increases are also influenced by population growth, historically low levels of stocks, high demands and a progressively weak US dollar to which several world currencies are pegged. However, apart from global demand and environmental maladies, higher input costs for labour and fertiliser have been fuelling the latest price increases.
Unfortunately, there is no end in sight for a levelling off of corn prices. There were about 110 ethanol refineries in operation in the United States at the end of 2006 with another 73 under construction. With generous government subsidies and a commitment to produce 35 billion gallons of ethanol by 2017, the enormous volume of corn required to produce this "clean" fuel will continue to send shock waves throughout the global food system. Sadly, at the epicentre of these upward price movements are billions of the world's poorest people.

The heightening demand for corn is decreasing the supply of other grains, including soybeans, because farmers are shifting fields to make room for corn. And, as economists will tell you, rising rice prices is an automatic result of rising wheat prices. When wheat prices rise and people shift to close substitutes like rice, they also go up. Economist at the Food and Agriculture Organisation (FAO), Adam Prakash, is forecasting substantial increases in the cost of imported food for least developed countries of upwards of 90 per cent above what they were in 2000.

In Mexico, for instance, President Felipe Calderon has had to ditch his free trade principles by forcing producers to sign agreements that fix the prices for corn products. His actions were precipitated by skyrocketing prices for corn on the world market that have been pushing up the price of the "humble tortilla", a main stay of the Mexican diet. This is no simple matter in Mexico, where 50 per cent of the country's 107 million people live on $4 a day, or less, and many of them survive on tortillas and beans.

The FAO is reporting that cereal import bills for the world's poorest countries are expected to increase by some 14 per cent above the 2006 level. As the FAO report states, "The total import bill of the Low-income Food-Deficit Countries (LIFDCs) is forecast to reach an all-time high of US$28 billion in 2007/08 and developing countries are likely to spend $52 billion on cereal imports. Wheat prices in the United States, for instance, increased from $4 per bushel in July 2006 to close to $6.5 per bushel in May 2007, translating to an increase of 63 per cent.
It's hard to think of a food that matters more - to more people - than rice. A pound of rice can easily feed more persons than a pound of yam can. Although it is grown in more than 100 countries, roughly 90 per cent of all the rice in the world is consumed in Asia where about three billion people depend on rice to survive.

According to the FAO, global rice consumption is estimated to reach 418 million metric tonnes in 2007, up from 414 million tons in 2006, while global rice production is expected to reach 415 million tonnes, down from 418 million produced in 2006. Global rice trade is expected to reach 29.8 million tonnes, up from 28.3 million tonnes in 2006. Strong economic growth in China has caused demand to rise more rapidly than supply, because growth in per capita income is increasing the consumption of rice.

Only recently, Agriculture Minister Dr Christopher Tufton gave the clearest indications of imminent price increases for most basic food items and pointed to the inevitability of growing backyard gardens to lessen financial burdens that are bound to come. I rather like the suggestion of self-reliance, but wonder about the ability of our people to just shift cultural gears overnight, when no such shift was envisioned.

In Jamaica's case, the passage of Hurricane Dean and the recent bout of heavy rains have exacerbated an already bad situation because domestic crops such as yams, bananas and sweet potato have been destroyed. And, as if acts of nature aren't challenging enough, the steady depreciation of the Jamaican dollar is not helping and is causing serious financial problems, especially for the most vulnerable. It will be interesting to see how government deals with these issues, although they are primarily driven by external geopolitical and economic happenings.

Julia's Comments:
As the prices of staples like rice and flour increase, everyone is feeling a pinch on their pockets. While some food vendors are able to absorb the increase in prices of these staples for the time being, in the long run, they may find that the burden is too heavy for them, and may have to resort to raising the price of the food they sell. Meanwhile, other food vendors have already started increasing the price of their food, or making use of alternative, lower quality brands. In a report on The Straits Times, it was also mentioned that prices of food in school canteens have been raised, if the food portions are not reduced. This has resulted in students packing food to school to save money, or to ensure that they do not have to study on an (almost) empty stomach. The hike in prices of commodities has indeed proved to be detrimental to both food vendors and consumers. Yet, it is hard to find an immediate solution for this acute problem, and consumers have no choice but to make do with the higher prices of commodities for now.

Posted by Julia

posted by - @ 10:01 PM 0 Comments