Thomas’s Ham & Eggery Guide to Inflation

Tuesday, March 07, 2006 | 08:30 AM

Last week saw a hefty spike in interest rates. In particular, the 10 Year Bond got slammed, as rates climbed to 4.684%, levels not seen since June 2004.

As we have discussed previously, we believe that ongoing inflation will be the key to the Fed, housing, the consumer, and therefore how equity markets will perform. The great irony of this is that most Wall Street economists do not see the inflation we do. Their focus has been on the core rate (ex food and energy). They also ignore the oddities of how CPI is computed, which tends to dramatically understate actual price increases.

Indeed, Economists may be the last people you should ask about real inflation. Sure, if you have a question about the Boskin PCE deflator, well then sure, any old dismal scientist will be your go-to-guy. But if you want the straight dope on inflation as it exists in the real world, you are much better off asking a housewife or a business owner.

So that’s exactly what we did:

Over the weekend, we spoke to numerous business owners. What they told us is very consistent with an economy that has reflated, and whose prices across a broad spectrum of areas have increased.

The broadest overview came from Thomas’s Ham & Eggery, a well konw Long Island breakfast joint (Carle Place ) that has been in business at the same place for over 33 years. If you go there on weekends, you better get there early, ‘cause by 8:30 there is a line out the door.

The menu prices had risen modestly since my last visit, so I spoke with Tom. He usually changes up the menu every now and again, but informed me that “this was the first purely price based menu change” he’s ever done. We discussed the factors driving the increase, and its exactly the sort of broad based inflation you would imagine:

-Electricity costs significantly more than 12 months ago;
-Food prices have risen (although not sharply);
-Sugar is noticeably higher;
-Energy Surcharges are showing up on all deliveries;
-Paper goods are up significantly;
-Insurance costs are rising 11-15% per year;
-Material products are also higher;
    (aluminum foil, styrofoam, wax paper etc.)
- Rent increase on the next lease renewal is a concern;
-Wages have remained stable throughout.

All the concerns we heard at Thomas’s were repeated by other merchants and entrepreneurs. And while we are well aware of the dangers of anecdotal evidence, we are just as concerned with the opposite: an over reliance on economic modeling which claims there is little or no inflation, despite a plethora of evidence to the contrary.

Our advice to the Dismal Set:  Economists need to get out from under the fluorescent glow, and experience real world firsthand. If they did, they would experience price increases and understand why we expect more Rate Increases, even beyond the upcoming FOMC meeting.

Tuesday, March 07, 2006 | 08:30 AM | Permalink | Comments (20) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post



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Housing has doubled in record time but there's no inflation! In fact, it's the same story with everything that has been sold on a monthly payment basis. Thanks to falling rates, there has been no inflation! Who cares about the end price? It's the monthly payment that counts!

The ones who paid cash should have felt the inflation but it wasn't too painful because the value of their assets went up too, easing the pinch!

But rates can't drop by much more so inflation is going to start rearing its ugly head. It will be interesting to see how creative our leaders will be when dealing with this new reality!

Posted by: D. | Mar 7, 2006 8:57:28 AM

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