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  • Writer's pictureJeff Matthews

This ‘Low Inflation’ is Starting to Bite!

Inflation pressures increased in 2005….

Nevertheless, the increase in prices for personal consumption expenditures excluding food and energy, at just below 2 percent, remained moderate, and longer-term inflation expectations appear to have been contained.

—2/16/06 Bernanke testimony.

Shortly after the new Federal Reserve Chairman Ben Bernanke presented the above testimony to the Eco-1 dropouts in Congress, a far more relevant sort of testimony was presented to Wall Street’s Finest by a publicly traded company which, unlike the folks at the Fed, consumes food and energy and all kinds of materials that do not seem to appear in the government inflation statistics.

The company was Guitar Center, a large musical instrument retailer whose stores carry pretty much anything a musician could want to play—with high end guitars lining the walls and drums crowding the floors.

The stores are staffed with actual musicians, which is good except that these musical junkies tend to prefer playing their chosen instrument on the sales floor, which they do as much as possible, to actually ringing up a sale. So the stores can be a little intimidating to a novice, what with all the Hendrix-type guitar solos wailing in the background.

Whether the stock itself has merits is a different discussion, but, being a hack drummer myself, I can say that it is almost impossible to leave a Guitar Center without either buying something or craving an expensive new piece of equipment.

In any event, the company’s inflation ‘testimony’ came during yesterday’s fourth-quarter earnings call after the market close, when management discussed the real-world pressures many retailers are now seeing as a result of the higher costs of not only energy but building materials, labor and money itself.

According to Bruce Ross, the CFO:

In terms of the cost of building out the [Guitar Center] stores, we have seen a roughly 20% increase of [building out] a large format store…and roughly a 10 to 12% increase in the costs on the [smaller store] format. So take Bernanke at his word: that inflation is well-contained. After all, Guitar Center is not raising prices on, say, Gibson Les Paul Classic guitars or Pearl MMX Masters drum kits by 20%.

Still, when costs go up 20%, somebody, somewhere, eats the cost. Somebody like Guitar Center.

Jeff Matthews I Am Not Making This Up © 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

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