Inflation Concerns: Are Higher Prices Here to Stay?

Brian Burton

Higher prices are here – I learned this last month when booking a rental car for our summer vacation, a 6-day rental for which I had typically budgeted $400-$500 was now going to cost over $1,000.  Although an unpleasant surprise, the reasoning is quite simple, the demand for travel has skyrocketed, in conjunction with a major shortage of rental cars after companies shed thousands of cars from their fleet during the pandemic and are having to replace them at much higher prices.  We have all by now heard a great deal of noise around supply shortages and transportation nightmares leading to higher end prices for consumers, which no one can deny.  The big debate now revolves around whether this is a short-term blip or if a global economy firing on all cylinders combined with prolonged global supply chain disfunction will keep prices moving higher over the next 12 months or longer.

If only listening to Federal Reserve officials, one would glean that the recent pickup in inflation data are simply a result of distorted year over year price comparisons, and not to worry about temporary pricing pressures.  In a speech last week Fed governor, Lael Brainard said, “If past experience is any guide, production will rise to meet the level of goods demand before too long.  A limited period of pandemic-related price increases is unlikely to durably change inflation dynamics.”¹ The Fed is also leaning on the idea that many companies have held prices flat for years and that even now with higher input costs, these companies remain hesitant to pass costs on to consumers.

Although the Fed appears confident in their views that any uptick in inflation will be transitory, the 4.2% increase in consumer prices in April certainly gained their full attention.  Vice chairman of the Fed, Richard Clarida said last week, “I was surprised, this number was well above what I and outside forecasters expected”².  He went on to stress the Fed’s willingness to respond if they are in fact wrong about the short-term nature of recent data, “we would not hesitate to act and to use our tools to bring inflation back down to our 2% longer-run goal”.  Exactly which tools the Fed would implement (raising rates, yield-curve control, tapering, etc) and how long they would allow inflation to run above their 2% target are still yet to be determined.

Meanwhile, business leaders around the world seem to have a very different view than the Fed when it comes to inflation expectations.  Of companies included in the S&P 500 index, the number of times “inflation” was mentioned during earning calls has more than tripled since last year, the biggest jump since 2004.  Not all that surprising given that April’s CPI increase of 4.2% was the largest gain in headline CPI data since September 2008.  Whether these price pressures are coming from a rapid recovery in the economy or are shortage-induced from snarled supply chains and rising demand for raw materials, many firms are or are planning on passing these higher input costs along to their customers.  Here is what Proctor & Gamble’s CFO, Andre Schulten had to say on their April 20 earning call, “The commodity cost challenges we face this year will obviously be larger next fiscal year.  We will offset a portion of this impact with price increases…The exact timing and amount of increases vary by brand and subbrand, in the range of mid-to high-single digits”³.  P&G is not alone here, there have been dozens of similar statements made by business leaders around the world regarding upcoming price increases.

Whether it’s food, used cars, lumber or something else in the basket of consumer goods, prices are going up almost across the board.  We don’t know how much further inflation can run from here or how long it will take for the supply chain kinks and labor shortages to get worked out, only time will tell.  More importantly, how consumers behave in the face of rising prices will determine the ultimate impact on the overall economy.

 

¹https://www.federalreserve.gov/newsevents/speech/brainard20210511a.htm

²https://www.morningstar.com/news/dow-jones/2021051211795/feds-clarida-surprised-by-inflation-report-but-stresses-need-to-see-more-data-update

³https://www.barrons.com/articles/heres-what-ceos-are-saying-about-inflation-this-earnings-season-51619132815

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