Inflation, what inflation?

Dow Chemical (DOW) today announced it was raising prices on ALL products by 20%.

The company is getting crushed by higher energy, transportation and commodity costs and has to pass along these costs in order to maintain its margins. Will customers buy less as a result?

From Bloomberg:

The increases are needed after a 42 percent jump in first- quarter spending on raw materials and energy, Chief Executive Officer Andrew Liveris said today in a statement. The increases take effect on June 1, Midland, Michigan-based Dow said.

Dow, which makes 3,200 products from Styrofoam insulation to pesticides and plastics, is trying to pass on higher costs amid company forecasts that spending on energy and hydrocarbon-based ingredients will climb to $32 billion this year, a fourfold increase from 2002. The rising costs are symptoms of a “true energy crisis” caused in part by the U.S. government’s lack of a comprehensive policy, Liveris said.

The energy costs are finally working their way through the system.

As I have written here before, the chemical sector is the nation’s building block. Their products are in all of our products. If they’re increasing their prices by 20%, what will their end users do?

Kimberly-Clark (KMB), manufacturer of Huggies diapers, Kleenex, and toilet paper (among other things) just announced they were raising prices by 10% to 12% effective this summer. Last February, they raised prices on these products by about 5%.

That’s a 15% increase in just the last six months. The company said they have NOT seen consumers flee to generic brands (not yet.)

Inflation? What inflation?

Well- at least Chicago is #1 in something.

Apparently, it’s gas prices.

A Marathon station near the loop is now charging $4.25 per gallon for regular gas. Premium was $4.55 a gallon. But even better, the Tribune took a picture of a BP Amoco station at Fullerton and Ashland selling regular for $4.49 a gallon. Yikes!

Chicago has higher taxes than many of the suburban counties, but even DuPage County is seeing $4.00 and $4.03 (two prices I saw just late last week.)

The $4.00 gasoline prices are here. Will they stay? We are only now entering the busy summer driving season. Historically, prices peak around Memorial Day and then decline the rest of the summer. We’re still a week away from Memorial Day. But it doesn’t seem like we’ll see much of a pullback in the coming months.

Will we see $5.00 soon in the City of Chicago? It seems highly likely given that some stations are now over $4.50 a gallon.

People are cutting back. They are watching when they drive to the store, restaurants, the movies etc.

Maybe the highways will be less congested?

Nah…(not from what I can tell so far.)

But behavior WILL change.

Those of you with those huge Suburbans or Hummers? The last laugh is on you.

Gold, by the way, has quietly slipped back over the $900 an ounce level. Perhaps gold knows something that the rest of us are seeing every day when we fill up our tanks.

The inflation genie is out of the bottle. And it hurts.

I recently discussed what is happening in the chemical market with two very capable people in that industry: my brothers.

Both have worked for a small chemical distribution company in the Chicago suburbs for over a decade.

They are seeing price increases that are beyond even the “norm”. It is simply beyond the beyond.

As my older brother, Tim, told me: “The markets are ready to crack” under the price pressures.

Every month this year has seen price increases on a host of products. And that is continuing into June. There are three different scenarios pushing up chemical prices.

1. The chemical is actually a crude derivative, such as toluene, which is made directly from crude, and is therefore tied to the price of crude. As crude goes up, so does the price of toluene and the other crude derivative products.

2. Or the chemical needs natural gas in order to get to the product- such as the ketone solvents. You need incredible heat provided by natural gas in order to produce the chemical. As natural gas prices go up, so does the cost of producing the chemical.

3. The third category of chemicals are related to potash- the same chemical in demand as a fertilizer. There is true pricing power here as demand exceeds supply. Potash (POT) is the largest producer in the world and is flexing its muscle. It is raising prices without a care in the world.

What’s happening in the potash category?

Caustic potash is rising from 12 cents a pound to 24 cents a pound in early June. Yes- DOUBLE what it was. For customers, this is just massive.

Phosphoric Acid, another potash chemical, has risen from 40 cents to 83 cents a pound in the last three months. Who uses Phosphoric Acid? Beverage companies like Coca-Cola.

These are staggering increases for anyone in that industry in a short amount of time.

Even for a fairly common, mundane chemical like caustic soda- the price has tripled. In the last few years it has gone from 5 cents to 16.5 cents a pound. Caustic soda is a key ingredient in cleaners for beverage companies and meat producers (among others.)

It’s all about China

China is a big producer of many chemicals including citric acid, which is also used in many beverages. According to my younger brother, Mike, the Chinese have stopped exporting it due to the Olympic games. Basically, all resources are being diverted to the Olympics. And now, with the earthquake? He says it will likely be even worse. There are shortages as the domestic companies aren’t producing it and now the Chinese aren’t shipping it.

What do shortages and rapid price increases lead to?

Instability in the market. Hoarding. Insufficient distribution.

And the energy costs are pushing up freight charges - which leads to more price increases.

For those who believe that the high energy prices can be “contained” or that inflation isn’t really an issue in the world economy- talk to those in the chemical industry. They see the writing on the wall and it isn’t pretty.

And there is no end in sight to the price increases.

The Fed will have a lot to grapple with today as it releases its FOMC statement.

We talked about inflation yesterday. It’s seemingly everywhere.

I saw this list in the Chicago Sun-Times today which nicely illustrates the economy’s issues:

* Home values: Down 12.7 percent nationwide in February compared with February 2007, according to the Standard & Poor’s/Case-Shiller index, out Tuesday. Chicago prices dropped 8.5 percent.

* Foreclosures: Up 112 percent in the first three months of this year, compared with a year ago. Almost 1 in every 194 U.S. households were in some stage of foreclosure, RealtyTrac reported Tuesday.

* Gas prices: $3.789 a gallon Tuesday in the Chicago area, a new record. That compares with $3.096 a year ago. Nationwide, the average is $3.607. Oil futures prices are up 74 percent from a year ago.

* Job losses: Some 80,000 jobs were lost in March nationwide. The Labor Department is expected to show another loss of 65,000 when it releases its April report Friday. The unemployment rate is 5.1 percent.

* Food prices: Egg prices have soared 35 percent in the last 12 months, to $2.20 a dozen; corn prices are up 26 percent, and rice is up 70 percent.

You have the housing deflation, which is massive. And then you have food and energy inflation, also massive.

Housing is most American’s largest asset, however. Earlier this week, one of the co-founders of KB Homes, one of the largest home builders, said he believes we’ll see at least another 20% decline in home prices.

If that isn’t deflationary- what is?

But the Fed has been flooding the world with cheap money (again.) That’s inflationary.

Will they finally stop today? And if they stop- will they start raising rates in the next few months?

Stay tuned. It’s about to get very interesting.