This article in the NY Times has several passages that I think illustrate why there are at least two phenomena that could be leading to a delayed impact of the current high oil prices.

First – There is an issue of the latency in large production quantities of both raw materials and finished goods.  Dow Chemical may make a batch resin, that then is made into luggage.  Each of these is made in relatively large production runs, then may be bought in large shipments.  Each of these steps adds a certain amount of time buffer.  Here is a quote from the above article

Costco’s profit was up in the first quarter, but James D. Sinegal, the chief executive, says he is “starting to be confronted with unprecedented price increases” for the merchandise that Costco buys to stock its stores. His first response has been to buy in extra large quantities so that he has stock on hand to carry him through subsequent price increases.

“We just made a big purchase of Tumi luggage,” Mr. Sinegal said.

So the 138 barrel oil prices are just making their way into some of the raw chemical materials now, they may take months before these higher prices reach the inventory of the luggage maker, and it may be months more before Costco has to buy another big shipment of the now much more expensive luggage.  We may watch oil prices hour by hour, or day by day – but the impact many highly processed complex products can lag quite a bit.

Second and perhaps a bigger issue is that companies, under the general impression that oil prices will be going back down, and in a highly competitive retail market, have decided to not pass on many of the energy cost increases, but instead have taken the hit in their own profits.  As profits were high at the start of the recent run up in oil prices, they could afford to be a buffer – but as oil prices stay high, and profits continue to shrink, they will have to pass on these higher energy costs.

Since last spring, the average profits of the nation’s corporations — from behemoths like Goodyear to small neighborhood retailers — have declined at an annual rate of nearly 6 percent, government data show.

If this rate continues, companies will HAVE to pass on the higher costs to maintain any profit, and then inflation, which has been hidden by this buffering has the potential to slam hard – on top of continued job cuts and decreased corporate profits (read stock prices), and the housing decline etc etc.  I guess you could label me a bear.

This one on how the economy woes are tied to what people expect in terms of lifestyle.  And for things to get better, people will have to change their lifestyle – not something most Americans want to do – hence, I think the economic problems will last longer.

 

A new NPR collaboration between All Things Considered and This American Life sounds promising. Their first program looks at the root origins of the subprime mess. Something I wish I had acted on earlier because I was one of the ones in 2004-5 predicting a train wreck (from the sidelines).

They had a teaser version of the show during the ATC show and the full length show is today.

I think it pretty dumb that in one breath the reporting is that there is no inflation, citing “core” inflation figures that exclude energy and food (if those aren’t core, what is?), while in the next breath touting that consumer spending is “up” (but not always noting that the spending increase is due to higher food and energy prices). Is someone trying to have it both ways?

Example 34,543,234 of why the details always matter