Forget About Inflation – Why "Greedflation" Is Running Rampant

by Andrew Zatlin June 16, 2023 2:00 pm ET

Everyone's focused on inflation.

But there's another economic indicator they're overlooking.

Let me show you what most investors aren't seeing, and what it means for your portfolio.

For a transcript of this video, see below. This transcript has been lightly edited for length and clarity.

Forget About Inflation – Why "Greedflation" Is Running Rampant

All eyes are on the Consumer Price Index ("CPI"), a proxy for inflation the Fed loves to monitor.

CPI data came in at a much milder 4%, signaling that the battle against inflation is being won. Now investors want to know what the Fed will do next.

The thing is, there's a different metric we should be focused on. Let me tell you about it...

And explain how it's creating a number of investment "winners" and "losers."

All About PPI

The metric I'm referring to is called the Producer Price Index – PPI, for short.

While CPI measures what consumers are paying for goods and services, PPI measures what producers are charging for goods and services. In other words, it's a measure of the cost of raw materials. As an example, if steel goes up, then producers will raise the price of autos.

Generally, PPI (the cost to make stuff) and the CPI (the cost to buy stuff) should be strongly correlated. But lately, we're experiencing a great divide. Let me explain...

Something's Not Right

Take a look at steel prices:

During COVID, prices skyrocketed. Supply-chain bottlenecks and labor shortages increased costs – makes sense. And starting last year, things returned to normal and costs came down. Now we're back to 2019 prices, and that's key.

We're back to pre-COVID levels. And yet, look at what producers are charging:

Granted, prices are down 15% recently, but that's only after they soared 40%. If input costs have truly reversed – if we've come full circle – wouldn't we expect to see a 40% drop in producer prices?

Therein lies the problem...

Greed Kills

Producers are being greedy. They're not passing along their cost savings, and instead creating what's known as "greedflation." Companies are jacking up prices not based on the cost to produce, but simply because they can.

We saw this happen in the airline industry under President Barack Obama. Oil prices went up, so airlines had to raise their baggage fees. But when oil prices came back down, those baggage fees didn't budge. That's greed, plain and simple.

Today, companies are raking in incredible margins. In fact, PPI has gone from 11% to almost 0%. Pretty soon, producers will be paying less for the same materials than they did last year and possibly pre-COVID. But will they trim prices to give consumers like us a break? Heck no!

Don't worry, though. We're not powerless in this situation...

We're Fighting Back

Retailers have noticed that consumers aren't spending money.

Home Depot (HD) and Lowe's (LOW) reported that consumers are putting off projects. BestBuy (BBY) announced a 12% drop in sales. Even MasterCard (MA) noted that while the number of transactions is the same, the amount of money spent per swipe is down.

In other words, the consumer is going on strike. And here's the thing...

We as consumers have a surprising ally.

Retailers to the Rescue

I'm talking about those very same retailers.

You see, retailers sell stuff. They want inventory turnover, which is hard when consumers are price sensitive and walking away.

So, what's a retailer like Walmart (WMT) going to do? Sit around and watch sales fall? Hardly.

It'll call up suppliers like Campbell's Soup (CPB) and tell it to lower its prices. If it refuses, Walmart will threaten to fill its shelves with other soup brands that aren't intent on price gouging.

Winners and Losers

Why is this so important? Besides the insult to your intelligence (and wallet), this is creating cracks in the economy. And those cracks are widening.

Producers have kept prices high for no other reason than greed. And while some will bend a bit to keep their items on retail shelves, others will dig their heels in...

Creating a flurry of winners and losers. Curious who I've got my eye on? Make sure you're a "Pro" subscriber to get all the details.

We're in it to win it. Zatlin out.