Wonder what possible beef a cola maker would have with the Fed?
PepsiCo’s chief financial officer has criticized US policymakers’ focus on “core” inflation, arguing that it overlooks the impact of rising prices on consumer spending power.So, food prices in the U.S. have gone up 3% in the last year; gasoline, 30%. But the Fed does not count them towards the overall price rise. Rather, it measures the price of some “core” items that have gone up only 1.2%. That is the official inflation of the country according to the Fed – 1.2% – the 30% fuel price and 3% food prices rise notwithstanding.
The Federal Reserve’s preference for the core price measure that excludes food and energy has stirred controversy as commodity price rises have accelerated and companies have had to judge how much they can pass on costs to hard pressed consumers ... Food prices have climbed nearly 3 per cent in the past year and petrol prices have increased nearly 30 per cent, according to the labour department’s latest consumer price index.
During the same period, “core” prices rose 1.2 per cent.
O.K, nice summary, you say. But it does not explain the anger of PepsiCo's CFO.
The explanation is that he wants to raise the price of his snacks and beverages but without the official fig leaf of the high inflation index, cannot do that.
But Nasser, if that is so, shouldn’t the CFO of Coca-Cola also be angry?
Good question. For the answer, let's go to today’s FT, under “Coca-Cola sales up despite rise in costs”:
Coca-Cola, the world’s largest soft drinks company by revenues, said on Tuesday that its sales had grown around the world during the first quarter, in spite of rising commodity prices and political turmoil in several of its markets.The CEO of Coca-Cola also confirms the price hikes in the food and energy sectors. But because his company is large, he has other tools for offsetting the costs; no “blanket prices increase” for them. All large companies that dominate the consumer goods market enjoy this privilege. From the FT of April 4, in an interview with the CEO of Nestlé:
The company added that it was carefully navigating an environment of rising food and energy prices, and said it would look to raise the price of some of its brands by 3 to 4 per cent later this year. Coca-Cola said it would begin selling smaller bottles in more markets for the same prices.
“We have a very flexible model in terms of managing revenue effectively,” Muhtar Kent, Coca-Cola’s chief executive told the Financial Times. “You will not see us making blanket price increases across all packages.”
Q: How are you coping with it [input price rise]?Do not be put off by his words which seem to have no meaning. He sounds vague precisely because the methods through which his company passes the price rise to consumers are subtle and cannot be explained in simple sentences. But the entire production process – starting from the cows – will be squeezed. That's the how-we-are-linked-with-so-many-farms part.
A: You don’t do it with pricing. Consumers don’t like that. You have to see the trend and work your organization on that line which is more stable, and that’s where our procurement, and how we are linked with so many farms, helps us.
The moral of the story is that size matters. Large companies have more way of absorbing the rising costs and stealthily passing them onto the consumer than smaller companies.
Meanwhile returning to the Fed, we are not clear about the controversy over the “core” inflation. What is it all about? The FT story explains:
The Fed argues that core prices are a better guide to underlying price pressures in the economy and therefore to future inflation – if it responded to headline prices, then it would have been forced to raise interest rates sharply in 2008 just as the economy was going into recession. But it has struggled to communicate this argument.I like “headline prices”. The "headline" adjective is the handy device of rogue politicians whenever they make unpopular decisions to benefit their handlers. Going against the popular will is supposed to show their firmness of conviction. In this way, they think that they turn their obedience to power into a positive trait. Think Tony Blair and George Bush.
“Headline prices” is used in the same vein. It implants in the readers' mind the belief that the Fed has higher standards, above and beyond what is reported in the headlines. Never mind that the 30% price rise of gasoline is real and the result of the Fed's own policies.
But that is the excuse that the public hears. What is the real reason that the Fed does not include food and energy prices in its calculation of inflation?
For starters, the Fed's policies are behind the price rise in these sectors, as we have already seen.
But seriously, I hear you asking, What is the “core” inflation stuff? How is it constructed? How did it come to be what it is?
The April 25th article gave the answer in the form of a comical exchange:
During an event in Queens, New York, last month, William Dudley, president of the Federal Reserve Bank of New York, was heckled when trying to explain the disconnect between food prices and other prices.The let-them-eat-iPad exchange is quite telling. (I wonder if any one of the hecklers was knitting intensely!) The rabble talk of food prices, Dudley talks of the iPad. Recalling the incident, he must have had a good laugh with his colleagues. Those ignorant Archie Bunkers, uncouth and unkind; what do they know about measuring the inflation?
One member of his audience questioned when he last visited a grocery store and another asked if an iPad – which he argued was getting more powerful for the same price – was edible.
Food items are generally commodities. The iPad is a manufactured product, produced by labor. With the labor costs constantly being pushed lower by advancing technology and increase in labor efficiency, iPad prices have remained constant, or even declined. That is what the Fed’s “core” inflation measures. Inflation, as used by the Fed, measures the excess manufacturing capacity. It has a totally different meaning and purpose than the one used by commoners in their everyday lives.
Therein lies the disconnect between the detached central banker and the rabble – and the businesses like PepsiCo which make money off of them.