United States, China Seeing Prices Rise Faster Than Expected

Today’s news starts with inflation information. Inflation numbers were released for China and the United States. China reported inflation on the producer level hit a 26-year high at 13.5%. In contrast, the U.S. Producer Price Index came in at 8.6% on Tuesday. One of the largest impacts to China’s rising prices was rising energy costs.

China also reported that consumer prices rose 1.5%, reaching a 13-month high. Rising costs in food and fuel were big drivers. However, China uses price controls and subsides to reduce consumer prices. This means Chinese companies may have to take the brunt of the costs, which could reduce their profitability. Chinese price controls on commodities and raw materials could also result in shortages for the country as foreign producers may funnel products to other countries willing to pay the higher prices.

The U.S. Consumer Price Index came in much higher than expected at 0.6% instead of the 0.4% forecasted for the month of October. Annual inflation was expected to be at 5.8% but was actually 6.2%. Core CPI was up 4.6%, but inflation was pretty much hotter across the board. The 10-year Treasury Yield rallied 1.49% on the news in premarket trading.

The CPI reported a 30% increase in energy prices. Oil had already rallied on Tuesday after the API Weekly Crude Oil Stock report came in much lower than expected. Later today the Energy Information Administration (EIA) will provide its short-term energy outlook. The White House is already getting pressure to release strategic petroleum reserves to help curb prices.

In light of the inflation news, Friday’s Michigan Consumer Sentiment report may garner more attention as investors look to see what consumers’ thoughts are on rising inflation and how it might affect their behavior.

Stock index futures were a little soft before the announcement and were little moved on the news.

Outside of the CPI report, a couple of stocks were making moves. DoorDash (NYSE:DASH) rose 17% in premarket trading after reporting plans to buy Finnish company Wolt for $8.1 billion. Wolt operates in 23, mostly European, countries. The news appears to have investors shrugging off the company’s miss on earnings.

RingCentral (NYSE:RNG) was also up ahead of the bell. The company rose more than 25% on better-than-expected earnings and revenue. RingCentral announced a partnership with communications company Mitel. Barron’s reported that RingCentral will pay $650 million to acquire Mitel’s intellectual property and patents related to network and call management, security, and infrastructure.

The electric vehicle IPO, Rivian (RIVN) is expected to start trading on Wednesday. The company has backing from Amazon (NASDAQ:AMZN) and Ford (NYSE:F). Its electric pickup came to market in September, beating both General Motors (NYSE:GM) and Tesla (NASDAQ:TSLA).

Before investing in an Initial Public Offering, be sure that you are fully aware of the risks involved with this type of investing. There are a variety of risk factors typically associated with investing in new issue securities, any one of which may have a material and adverse effect on the price of the issuer’s common stock.

Cryptocurrency broker-dealer Coinbase (NASDAQ:COIN) was down nearly 10% in premarket trading after missing on top and bottom line numbers. The company reported lower trading volume and fewer users as reasons for the miss.

Vaccine maker BioNTech (NASDAQ:BNTX) dropped 4.85%, despite beating earnings and revenue estimates. The company lowered guidance on the sales of its COVID-19 vaccine. BioNTech partnered with Pfizer (NYSE:PFE) on the vaccine, so the news prompted a 1.78% drop in the stock on Tuesday.

Passing On Prices

When considering the PPI and CPI reports, it appears that producers are pushing more and more of their rising costs on to consumers. This could mean that November’s CPI numbers could be higher still. Many companies have already issued warnings about rising prices.

Last week, Mondelez (NASDAQ:MDLZ) announced earnings and told investors that prices on its products that include snacks like Oreo and Chips Ahoy! cookies, Ritz crackers, Toblerone chocolate, and Sour Patch Kids will rise about 6% to 7%. Last month, Unilever (NYSE:UL) told investors it plans to raise prices on products that include Dove soap, Lipton tea and Klondike bars about 4%. McDonald’s (NYSE:MCD) also announced last month that prices would increase about 6%.

Disinflation Versus Deflation

Despite the quickening of inflation, the global economy has experienced mostly disinflation and deflation over the past 10 years. Disinflation is a slowdown in rising prices, and deflation is the falling of prices. For the most part, the CPI has risen over the last 10 years but at a slow rate. The Fed normally wants to see inflation rise at 2% per year. However, this hasn’t happened for many reasons. Let’s look at three.

First, globalization and freer trade provides increased supplies and cheaper labor.

Second, globalization means more participants and more mind power and, therefore, increased ingenuity. So, more and more people are finding new and efficient ways to mine, drill, and harvest raw materials. For example, producers can get more utility out of a barrel of oil today than they could 30 years ago.

Increased mind power ties closely with the third reason I wanted to highlight—technology. Cars and machines run more efficiently and longer without breaking down, harvesting machines get more out of each shovel or pipe, and refiners can get more of the raw materials—and all of these segments create less waste. Additionally, technology provides better and faster computers, TVs, phones and so on. Back in the day, my family had to spend $12 to rent a VCR and a couple of movies for a night. Today, we have access to hundreds of movies for $12 a month, not including internet costs. Mom popped popcorn on the stove and melted butter. Today, I can have kettle corn popped in the microwave with very little effort and mess.

These lower costs have provided an environment that has allowed business to flourish. It’s difficult to say if this means commodity prices will eventually catch up, but right now people are already coming with new ingenious ways to solve the current inflation problems.

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