Not long ago I wrote that we don’t have to be victims of inflation, implying that we have lots of choices when we shop for stuff. That may be true in normal times, but we haven’t seen any of those for quite a while and are unlikely to see any for a while yet. The damnable war sparked by Russia spurred me to review what I thought I knew – during the exercise I learned some new stuff.
Here’s something we’ve experienced for years – the stealth bomber called shrinkflation. Shrinkflation is when producers reduce the size or quantity of a product while the price remains the same or slightly increases. If you regularly buy spaghetti sauce or canned tuna or Coke or toilet paper or ice cream or peanut butter or bacon or dish soap, you’ve been a victim. Coke for example, reduced the size of its large bottle from 2 liters to 1.75 liters.
Breyer’s ice cream used to be 64 oz., now it’s 48 oz. Bacon, almost every brand, used to be 454 grams, now they’re 375 grams – all for the same or a slightly higher price. Not much you can do about it except complain and/or not buy.
Next, what commodities are really important – where do they come from and what do they become when they’re manufactured into goods? Here’s a primer:
Oil – used for transportation and to power machinery. Price change, year to date (YTD): over 60 per cent. Russia is the world’s third-biggest oil producer. Most of Russia’s oil exports go to OECD Europe, and 20 per cent to China — but our prices rise too.
Natural Gas – used by utilities to generate electricity. Price change YTD: 35.8 per cent. Russia supplies almost half of the European Union’s gas. Germany is heavily reliant on Russian gas, and imports 35 per cent of its gas from there. But our prices rise too.
Coal – used by electric utilities to produce electricity and by steelmakers (as coking coal or steelmaking coal) to manufacture steel. Price change YTD: 146.90 per cent. Russia is the world’s third-largest coal producer. Russian coal accounts for roughly 30 per cent of European metallurgical coal imports and over 60 per cent of European thermal coal imports.
Wheat – typically milled into flour which is then used to make a wide range of foods including bread, pasta, cereals. Price change YTD: 68 per cent Russia is the largest wheat-exporting country.
Nickel – a key component in the production of stainless steel and batteries for electric vehicles. Price change YTD: 99.29 per cent. Russia accounts for around seven per cent of global nickel output.
Palladium – used in the production of catalytic converters to reduce emissions. Price change YTD: 75.13 per cent. Russia vies with South Africa for the position as the world’s largest producer of palladium.
Copper – used to manufacture electrical equipment – like wires and motors — and industrial machinery like heat exchangers. It’s used in construction, on roofs and in plumbing. Price change YTD: 10.41 per cent. Russia supplies about 3.5 per cent of global copper. Supply disruptions from Russia, are exacerbating acute supply constraints.
Lumber – used for wall framing for single and multi-family homes, furniture, flooring and ceiling. Price change YTD: 25.53 per cent Russia is the largest lumber exporter in the world. Even if the war stops there may not be much price relief. The U.S. housing shortage and home renovations are keeping demand high.
Aluminum – a component of window frames, electrical transmission lines, airplane parts, and other manufactured goods. Price change YTD: 43.72 per cent Russia is the world’s biggest aluminum producer behind China. Aluminum is one of the most energy-intensive materials — the surge in oil, natural gas and coal has fed into a comparable rise in the cost of aluminum.
Not much you can do here either. I fear that supply disruptions for just about every car, fridge, house, you-name-it, will continue for longer than we thought when the pandemic was our only enemy. I fear we are going to have to pull in our belts for an extended time.
Dian Cohen, C.M., O.M., economist cohendian560@gmail.com
