Artificial Inflation

The fix is in and it may explain why inflation has gotten so far out of control.

Price fixing is that charmingly illegal activity where businesses decide to play nice and agree to set prices, rather than letting the rough and tumble of market competition do its thing. Colluding on price is obviously anticompetitive and hurts consumers. Antitrust laws make this practice illegal because price fixing sabotages free market competition, inflates prices, and limits consumer choices.

Wonks have discerned that 27% of all inflation we saw in 2021 was from collusion in the oil market. Academics have argued that major market players are using the excuse of short-term supply side shocks during the pandemic, along with technology, to collude on pricing; adding to our inflationary woes.

Algorithmic pricing uses a set of computer coded rules to set prices based on a myriad of data—demand, costs, competitors' pricing, whether you are in the store or not…even setting higher prices just for you on your pay day.

Personalized price gouging from the comfort of your own home!

These algorithms, though efficient, can quickly turn into digital back alleys for collusion. There is a burgeoning industry of data and algorithmic pricing companies that provide major industry players with data and algorithms. Problems arise when competitors decide to use the same algorithm or exchange pricing data from the same data and algorithm vendor. When that happens the price uniformity in the marketplace - particularly the coordinated spirals upwards - look and behave exactly like traditional price fixing.

For instance, RealPage, a real estate technology company, got in hot water because landlords were caught using RealPage algorithms to synchronize rent hikes, effectively eliminating independent pricing decisions and making rents skyrocket. Such collusion, whether orchestrated by handshakes or algorithms, significantly distorts market dynamics. This can cause prices to spiral upwards at an alarming rate.

By pushing prices artificially high, these shenanigans contribute to overall price increases, nudging inflation upward. This price padding removes the natural competitive urge to lower prices, thus adding more helium to the inflation balloon.

A solution to this problem will necessarily involve government intervention in the form of enhanced regulatory oversight, but let’s not hold our breath. We should all be aware of what these algorithms do, avoid the trap of loyalty programs, don’t buy things through an app, and generally be more price conscious - there are apps that can help you track prices as well. The more we arm ourselves against these nefarious price increases, the better off we will be.

Speaking of better off, let’s see what’s due to move markets this week:

Earnings Season Soft Launch. Typically publicly traded companies report their earnings from the previous quarter at the start of the next one. That means earnings season kicks off in earnings July 1st. Well, this week we get a little preview with these companies reporting earnings:

• Nike, Inc. (NKE)  Analysts expect Nike to report earnings of 84 cents per share, a 27.3% increase year-over-year, on revenue of $12.9 billion, reflecting a modest 0.2% increase. Nike has had some down days of late as consumers have more options for running shoes, and they’ve somewhat struggled to keep up with other athleisure brands. That’s born out in the flatness of the stock. Maybe we’re building a base of support at this price level. In that case, the next move may be higher, but ultimately, the proof will be in the earnings report. Oppenheimer analyst Brian Nagel has upgraded Nike to "Outperform," suggesting a belief in the company's potential to rebound as it focuses on strategic efforts. Nike is actually reporting on Q4 earnings, so this could be a rosy report helped by the holiday season.

  

• FedEx Corporation (FDX) Analysts forecast earnings of $5.36 per share on revenue of $22.1 billion. This marks a year-over-year earnings increase of 11.1%. Fedex’s business model is obviously cost intensive, and recently they have felt pressure from higher incentive pay and lower airfreight prices (higher prices because of more demand or price gouging though?). That’s played out over the last three years as we see how volatile the stock has been. It will be interesting to see how FDX manages these margin pressures and if they can deliver on these numbers.

  

• Micron Technology, Inc. (MU) The semiconductor heavy will report earnings Wednesday. The company's performance is often seen as a barometer for the broader tech sector. Revenue is projected at $6.7 billion, up 77.6% year-over-year. This is another ‘demand versus price gouging’ story: their prices have been high and they have been telling us there is increased demand to explain those increases- we shall see if that demand was in volume or just a result of the higher prices (we measure demand in dollars). Wedbush analyst Matt Bryson has raised his price target for Micron, indicating optimism about the company’s future performance, so this earnings report will be important not just to the company but for the broader tech sector.

  

• Walgreens Boots Alliance, Inc. (WBA). On Thursday this massive pharmacy retailer reports. Analysts expect earnings of 71 cents per share. Key areas of focus will be Walgreens' strategies for growth amid a competitive retail and healthcare landscape, its cost management initiatives, and its progress in digital transformation. As we can see from the chart, the last three years have been tough on Wallgreen’s. The impact of macroeconomic factors on consumer spending should play out in this report - perhaps will start to see margin compression as people continue to experience sticker shock at how high prices have risen. Or do we get a surprise to the upside further making the case for a strong and resilient consumer?

  

Fed Meeting Minutes. Last week, the Fed decided to keep its target range for the federal funds rate unchanged. This week it releases the minutes from that meeting for us to pick over like the data hungry vultures that we are. The Fed's interest rate decisions are pivotal as they influence borrowing costs, consumer spending, and overall economic activity. Bond traders are pricing in at least a cut by .5% federal funds rate by the end of that year. If that rosy attitude continues this week, we should see a positive finish in the markets by the weekend,

De-globalization. Increasing economic decoupling, especially between the US and China, continues to impact global supply chains and trade dynamics. This decoupling includes efforts to reduce dependency on each other’s goods and technology. Combine this with the potential for the Bank of England to cut rates ahead of their snap elections and the ECB also considering cuts, geopolitics and monetary policy news should be interesting this week. Economic decoupling can lead to shifts in global trade patterns, affecting industries reliant on international supply chains - which is pretty much all of them at this point. These international policy decisions, can lead to increased costs for businesses here at home as they seek alternative suppliers and markets, impacting profitability and economic growth. Global investors monitor these actions to gauge the economic outlook and make investment decisions.