International Forecaster Weekly

PRICES RISING AS HOLIDAY SEASON APPROACHES - Negative Real Interest Rates Good for Gold

Buy your holiday gifts now.

That’s the message from retail executives, who are warning that both shoppers and investors should brace for a challenging holiday season.

Guest Writer | October 1, 2021

By Dave Allen for Discount Gold & Silver

Buy your holiday gifts now.

That’s the message from retail executives, who are warning that both shoppers and investors should brace for a challenging holiday season.

Their red flags are being raised as soaring prices, empty store shelves and pessimistic forecasts from retail chains paint a dismal picture.

Bed Bath & Beyond is one of them — they and other U.S. companies like them have been crushed by skyrocketing freight costs.

How bad is it, you ask? Let’s put it this way: when the usual “great quarter, guys” is replaced with “good luck,” you know things aren’t looking too good. 

BB&B reported a 26% drop in sales for the three months through August, and the business swung to a loss. A 29% plunge in its share price followed, dragging down several other consumer stocks with them.

The home goods company attributed much of the summer slowdown to rising Covid cases in population-heavy Florida, Texas and California. 

But analysts point out that demand in other industries hurt by the spread of the delta variant, such as travel and restaurants, is already rebounding again.

So, what gives? In a word, margins — they’re giving way to supply-chain difficulties. 

Prices Up at 3-Decade High

On the heels of this news is the Commerce Department’s latest report showing that inflation is running at a 30-year high.

Today’s release shows that the personal consumption expenditures index was up 4.3% from a year ago in August, as, yes, supply chain disruptions and extremely high demand fueled ongoing price pressures.

That increase reflects a 25% increase in energy prices and another 2.8% rise in food costs — the highest since January 1991.

It’s those kinds of inflationary pressures that Fed Chair Jerome Powell told Congress earlier this week he finds “frustrating.”

The rise in the PCE came as personal income increased 0.2% for the month — suggesting that real income is falling as inflation rises. 

Personal savings totaled $1.7 trillion, representing at a 9.4% rate — a decrease from 10.1% in July. 

The savings rate peaked at 33.8% in April last year in the early days of the pandemic as the government rushed out payments to individuals.

BB&B Is Instructive

BB&B CFO Gustavo Arnal says the company’s business plans originally baked in an anticipated 240 basis point increase (2.4%) in freight costs, to get its products from factories to the stores, for the latest quarter. 

But the actual costs decimated that estimate, climbing instead by 360 basis points (3.6%). 

Despite a housing market on steroids, the entire home-furnishings industry is experiencing weaker traffic and interest. 

            Nike said just last week that unprecedented container-ship backups, new shutdowns in Vietnam and a shortage of truck drivers in the U.S. are causing products to take twice as long to make their way through the supply chain. 

Costco, Home Depot and Walmart are all chartering their own vessels in an attempt to work around the growing congestion. 

Inflation has also hit grocery stores and gas pumps on both sides of the Atlantic. Now, even Dollar Tree is being forced to raise prices on some goods above the sacred $1.00 level. 

BB&B seems more optimistic for the rest of the year — not that supply-chain or inflation struggles will ease by then, but that the retailer will better adjust to these new realities. 

The chain, at one time known for its ever-present 20%-off coupons, cited more targeted marketing efforts and promotions to try to bring customers back to its stores. 

Still, investors and analysts are skeptical — not just with BB&B, but with the entire industry — and one metric reflects the doubt: 

After BB&B’s gross margin shrank 640 basis points to 30.3% last quarter compared to a year earlier, it’s forecasting a questionable rebound to as high as 35% for the full year. 

That outcome requires pushing prices skyward when consumer demand for its products is already showing signs of waning.

Good luck with that strategy, BB&B. You’re only going to push more consumers to the likes of online behemoth Amazon.

The bottom line.....rising inflation in this period of ultra-low interest rates (even with rates rising recently) still means low real rates.

And that’s good for gold and silver.