How Inflation Works (or Why Your

Chicken Is Going to Cost More)

By MATT PHILLIPS and NATALIE KITROEFF FEB. 14, 2018

It’s the worrisome byproduct of a healthy economy:

inflation.

Just about every nation on earth is now growing.

Europe and Japan finally pulled out of their doldrums.
And the United States economy, which continues to
chug along, could get some extra juice from the tax
cuts and other deficit-increasing moves by the
government. Last year, the American economy ended up growing
at a better-than-expected 2.3 percent rate — and it is
To economists, executives and investors, there can be gathering strength. The Federal Reserve Bank of
too much of a good thing. The fear now is that inflation Atlanta estimates that the economy will expand at 3.2
will start to rise more quickly, potentially crimping percent this quarter.
global growth or forcing borrowing costs higher. That
prospect spooked the markets earlier this month,
A growing economy increases demand
briefly sending stocks down more than 10 percent
before investors recovered their nerve.
As the economy gains momentum, companies and
business buy more. Metal tubes. Industrial hose.
While still low, prices are starting to rise, in what
Accounting and legal services. Steel. Wireless
would amount to a major shift if it persists. Higher
internet. Tires. Printer toner.
prices for rents, gasoline, medical care and food
helped drive prices up 2.1 percent in the 12 months
And amid the Amazonification of American retail,
that ended in January.
cardboard boxes. Lots of cardboard boxes.

The root of inflation is a strong economy
After the global financial crisis, the world sank into
one of the deepest recessions since the Great
Depression. And for most of the last decade, it has
been in an economic funk, characterized by low levels
of growth and piddling price increases.
To get their economies out of that rut, central banks
helped push interest rates sharply lower. The goal was
to bolster investment and growth. And now it appears
that the world economy is finally starting to generate
real momentum.
“Clearly demand is strong,” Thomas A. Hassfurther,
head of the corrugated products division at the
Packaging Corporation of America, said on a
conference call with analysts. “We're in a phase now
where the box business is tracking the G.D.P. a lot
closer than it had been.”
To make more boxes, his company needs more of the
material that goes into them, like raw cardboard fiber
and chemicals. And it is paying higher prices for both.
“We're competing with everybody for that same
shortage of labor and equipment,” Mr. Hassfurther
said.

The United States has been ahead of the pack, having

started its somewhat sluggish recovery in the second
quarter of 2009.
 To get raw materials in and
deliveries out, companies need trucks
Trucks deliver the raw ingredients and trucks deliver
the final goods. But there is a limited supply of trucks.
Basic economic theory then kicks in. When demand
goes up and supply holds steady, prices should rise.
Essentially, companies that need things shipped are
willing to pay more to get them delivered.
Sure enough, so-called spot rates for freight — the
price for deliveries not covered by longer-term
contracts — rose by more than 20 percent last year.
Those rates aren’t likely to fall anytime soon. While
trucking companies are ordering more vehicles for
their fleets, it will take time for those rigs to be ready.
And even when they are, an acute shortage of drivers
could limit the number of vehicles deployed.
“If you buy more trucks, the challenge is finding
enough drivers to put in those trucks,” said Bob
Costello, the chief economist of the American
Trucking Associations.
With a shortage of
truckers, wages will rise
When trucking companies need more employees, they
simply offer more money. In recent months, hourly
wages for truckers moved steadily higher. In the fall,
their annual growth rate exceeded 4 percent, the fastest
pace seen since late 2013.
When Eduardo Andrade looked at one of his paystubs
in the fall, the trucker thought his boss might have
made a mistake. His check from Baylor Trucking, a
family business based in rural Indiana, showed that he
was earning 52 cents per mile, up from the 48 cents he
had been making. He often drives for three straight
weeks, moving food and garments from the East Coast
to the Midwest and then hauling insulation materials
back. The raise will fatten his paycheck by $6,000 per
year, if he maintains his regular mileage.
“This is the biggest increase I have ever had with the
company,” said Mr. Andrade, who has driven for
Baylor for a decade. The 60-year-old has seven
grandchildren and plans to spend his extra cash to buy
them more movie tickets, clothes and pizza dinners.
Surging transport costs eat into profits
Those higher wages have to be paid for — and it’s
usually trucking customers that end up footing the bill.
For example, during the third quarter, packaged food
companies, which need lots of trucks to ship their
products, saw their margins shrink by 0.8 percentage
points. They attributed the trend, in part, to rising
freight costs.
“All my companies are talking about it,” said Robert
B. Moskow, an analyst who researches companies in
the food industry for Credit Suisse.
 Companies pass on
those costs to consumers
Corporations are in the business of making as much
money as possible, and they generally aren’t inclined
to simply accept thinner profit margins.
They have a couple of options. They can try to reduce
costs in other parts of their businesses. Or they can try
to charge more for their products.
Tyson Foods, the giant meat and chicken company,
recently told analysts that it planned to increase prices
to offset rising freight costs. Tom Hayes, Tyson’s
chief executive, estimated that rising freight prices
would cost the company more than $200 million this
year. “Ultimately, the consumer is going to pay for it
at some point,” Mr. Hayes said.
Tyson would be able to offset $200 million in freight
costs by charging roughly 1 percent more for its
products, according to Mr. Moskow, the Credit Suisse
analyst. For a pound of boneless chicken breast —
an average price of about $3.07 — that would be a
price increase of 3 cents.
By itself, a 3-cent price increase for a pound of chicken
isn’t significant. But recent signs suggest that prices
are edging higher for a range of products, like oil and
gasoline, clothing, car insurance and medical care.
And if other industries follow suit, it would mean that
the United States — and likely the world — is finally
shifting into a higher economic gear after over a
decade of sputtering.
Case Questions:
1. How did monetary policy help economies
after the Global Financial Crisis?
2. How does a healthy economy result in higher
inflation?
3. “The International Monetary Fund (IMF)
said on Thursday that the Trump
administration's proposed expansionary
fiscal policy would be "counterproductive" at
this stage of the economic cycle”.
Why do you think governments resort to
expansionary fiscal policies? And why can
there be some popular resistance to adopting
such a policy?