The stock market is dropping, Wall Street analysts are flummoxed, but it just isn’t rocket science folks.  It’s Main Street economics 101.

The price to produce, manufacture and transport goods has skyrocketed, that’s the Producer Price Index (PPI).  Arriving goods at retail are significantly higher in price.  Simultaneously, consumer spending is being squeezed by unavoidable inflation in housing, energy, food and gasoline; so consumer spending is tight, that’s the Consumer Price Index (CPI).

Higher costs to retail that cannot be passed on as higher prices to customers, means lower profit margins for the sellers.  That’s it.  That’s the majority of it.  Major retail companies like Target and Wal Mart are reporting the impacts from the squeeze in higher costs that cannot be passed to consumers in higher retail prices.   Checkbook economics.

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Businesses are seeing higher costs in the unavoidable goods they need to sell, the fixed price of goods.  What comes next?  Businesses, knowing they cannot raise prices too much, look at lowering the costs of operations in an effort to remain competitive, stay profitable, and stay in business.

How do businesses lower operational costs?  Increase expectations of employee productivity and/or lower employment costs.  That leads to layoffs.

I guarantee you…. YOU know more about the basic principles of Main Street economics than a room full of these Wall Street analysts.   I like El-Erian, but sheesh, talk about pretending not to know things.

Look at the companies.   The companies most exposed to wholesale inflation, those who deal in highly consumable goods like food, are the companies that will see their profit margins shrink fastest.

Highly consumable goods rise in price from origination (field) to destination (fork) the fastest.

The next phase covers the same results in durable goods.  That’s when things get really ugly.

 

 

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