Contrary to the Fed's opinion, it certainly doesn't appear that "longer-term inflation expectations have remained stable", and the end of the just-in-time inventory model (if that happens broadly) could make a bad inflation situation much worse...


Companies Stock Up as Commodities Prices Rise

Companies contending with rising commodity prices are stockpiling rubber tires, cotton clothing and other goods, a maneuver that is aimed at insulating them from inflation but also could contribute to it.

Spice-maker McCormick & Co. stocked up on some ingredients and Monro Muffler Brake Inc. bought extra tires and motor oil, assuming prices of those goods will keep rising. Anton Sport, a small athletic-wear wholesaler in Tempe, Ariz., amped up its fabric purchases to avoid higher prices.

These pre-emptive purchases are a fraction of overall business activity, but the trend is being watched by economists and business executives. The stockpiling comes at a pivotal moment for the global economy, as central bankers scramble to judge the impact of raw-materials price increases and figure out whether or when to raise interest rates.

Purchases made more because of perceived inflationary pressures than a response to demand are important because they signal that inflation expectations are climbing. Economists often focus on inflation expectations, because they can spur people to speed up their purchases, in turn driving prices higher.

"The price increase then becomes a self-fulfilling prophecy," said Zach Pandl, an economist at Nomura Securities. Once the cycle ends, prices can collapse, he said.
The hardest part is pinpointing when this cycle begins and figuring out when to step in to quell it.

John Anton, Anton Sport's founder, saw the price of cotton shooting up, and decided to act. Last month, when his T-shirt suppliers warned about the fourth price rise in six months, he borrowed $300,000 through his home-equity line of credit and bought more than a year's supply. Mr. Anton typically has about 30 boxes of shirts on hand at one time, but now has more than 2,500.

"It just kind of clicked that I can borrow at 2.45%, and if cotton is going to go up between 10% and 12%, why wouldn't I do this?" Mr. Anton said. Cotton prices rose 92% last year, and are up 22% this year.

Mr. Anton anticipates another increase in March. If many other companies make similar moves, it could present a conundrum for the Federal Reserve. The Fed will need to figure out whether any increased buying is meant to meet rising consumer demand or whether it is an effort to beat inflation.

"Only the buyers of the inventory themselves know for real what's going on," Mr. Pandl said. "It does make the Fed's calculation difficult."

The Federal Reserve's policy-making Federal Open Market Committee nodded to rising commodity prices in its latest statement, issued last week, but also played down concerns, saying that "longer-term inflation expectations have remained stable."

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Monro Muffler, a Rochester, N.Y., company that operates nearly 800 stores in 19 states, moved up purchases as well, mostly to get ahead of cost increases, according to company officials.

Total inventories were up 11% from March to December, climbing to $95.6 million from $85.8 million, and about two-thirds of that increase was due to advanced buying, said John Van Heel, Monro's president.

"Buying ahead of cost increases is a normal part of our management of the business," said Mr. Van Heel, one strategy he said Monro used more in 2010 than in the prior year.
Monro also was able to make the purchases in part because it had available credit and the warehouse space to store extra tires, said Catherine D'Amico, the company's chief financial officer. Monro also filled the oil tanks at its shops to capacity.

The advance purchases are striking because there are a variety of hurdles to bulking up supplies, including generally tight credit, concern about the impact of high unemployment on consumers, and a widespread preference for just-in-time deliveries.

To be sure, data at the national level suggest that many manufacturers still are trying to get back to normal inventory levels after paring back during the financial crisis.
Manufacturers' inventories have risen for the past seven months through January, according to the Institute for Supply Management. But Norbert Ore, who runs the institute's manufacturing survey, said that is mostly companies restocking to meet rising demand.

Nonetheless, the January survey showed that prices for roughly two dozen commodities, from aluminum to sugar, were rising, while none showed signs of falling. Two years ago, just four were getting more expensive, and 15 were falling.

Mr. Anton, the T-shirt seller, bought mountains of shirts after receiving letters in January warning of an imminent price increase. One supplier's letter, a copy of which was reviewed by The Wall Street Journal, urged customers to "wrap up most of your pending orders and buy at the best possible prices."

Mr. Anton had to pay more to insure his cache and install new security. But he said the purchase gives Anton Sport, which generated $6 million in sales last year selling to schools and businesses, a competitive edge.

"What's exciting here is we can now go to somebody like McDonald's and say: 'We have a price that's going to beat everyone around,' " Mr. Anton said. "At this point, I don't know if I'm the smartest guy in the room or the dumbest. But I can't see prices returning to where they were anytime in the near future."