Buffett versus Bernanke: Who do you believe?

Last Friday was nirvana for those following financial news.

On the one hand, you had Warren Buffett, the greatest living investor in the world (maybe the greatest investor ever), on CNBC for three hours on Friday morning. He espoused on a variety of topics such as how many cherry cokes he would drink during the show to the slowing of the economy.

But his most interesting comments were on inflation.

Buffett Warns about Inflation

Berkshire Hathaway, as you know, controls quite a few companies. I’m ashamed to admit I don’t know how many (dozens?). They own everything from Pampered Chef to Geico to Dairy Queen. Berkshire’s companies are in a wide range of industries.

While Warren doesn’t himself run all of those companies, as Berkshire’s CEO, he gets monthly reports from his managers telling him what is going on with each business.

He said the July reports were interesting. He gave a specific example of one of their carpet businesses which he said the carpet was basically made out of oil (bet you didn’t know that carpeting is a petroleum-based product. But that’s a subject for another post.)

He said that company was getting price increases nearly every day from its suppliers and that of course it was pushing through price increases on its own products as its margins were shrinking. But even with the increases- the company couldn’t keep up with rising raw material costs.

Asked by CNBC’s Becky Quick if these price increases will be seen throughout the economy eventually- he answered “yes” and thought that the CPI would be reflecting them soon. He basically didn’t believe that the CPI was measuring the inflation in the economy.

His comments on inflation are exactly those that I’ve been hearing from many others in the business community. As I’ve said before- the inflation genie is out of bottle.

Bernanke said inflation will “moderate”

Ben Bernanke, the Fed Chairman, gave a speech in Jackson Hole, also on Friday, discussing the state of the economy. From the Financial Times:

Speaking at the start of the Federal Reserve’s annual retreat in Jackson Hole, Wyoming, Mr Bernanke said the shift in currency and oil prices, as well as weak growth, “should lead inflation to moderate this year and next”.

Such a scenario would mean that commodity prices would likely have to fall even further than they have in the last month.

There’s no doubt that inflationary pressures ease as growth slows. But companies continue to push through the price increases and it’s unlikely that they will suddenly stop and roll them back.

Are any of the airlines saying they’re getting rid of their baggage fees now that crude has fallen below $120 a barrel?

I haven’t heard of any.

Instead- all I’m hearing about is more price increases on goods and services.

Hershey’s just announced it was raising prices 11% after already raising prices last January. Mars also announced it too would raise prices- but didn’t say by how much. Mars also raised prices last January- following Hershey’s lead.

This all comes on the heels of the chemical companies announcing 20% increases.

Who Do You Believe?

The stock markets all rallied on Bernanke’s comments- virtually ignoring the Sage of Omaha. Moderating inflation sounds wonderful, doesn’t it?

Bernanke v. Buffett.

Academic v. CEO.

A wise investor would be smart to listen to Mr. Buffett.

Who’s going to put the inflation genie back in the bottle? Looks like it won’t be Fed- at least not under this Chairman.