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The US government reported last week that consumer prices, excluding food and energy, rose at their fastest rate since 1992 in May. Sherwin-Williams (SHW) is raising the price of paint, one of several companies responding to rising commodity costs, and the CFO of restaurant and arcade chain Dave & Buster’s (PLAY) said during a recent earnings call with analysts that it expects a 6% to 8% increase. in food costs for 2021 due to higher prices for chicken, beef and dairy products.
Wages are also rising, especially for those working in the retail, entertainment and hospitality sectors who are returning to jobs as the economy returns to openness. This adds to inflationary pressures, because some firms will choose to raise prices in order to preserve profits.
Lack of employment does not help.
The CEO of online pet retailer Chewy (CHWY) wrote in a letter to shareholders after his latest earnings report that he “is facing a labor shortage in our fulfillment centers similar to those faced by many companies nationwide.” As a result, Chewy “continues to invest increase wages and benefits” to fill vacant positions. However, investors – and the Federal Reserve – are dismissing the rise in inflation as “temporary”. Long-term bond yields fall, which usually doesn’t happen when inflation intensifies. If bond investors believe price hikes are here to stay, they will demand higher yields, and the market rates with only a 3% chance of a Fed rate hike by the end of the year. That’s less than a 10% chance of higher rates just a month ago. Investors know that a rate hike is the central bank’s best tool to fight rising inflation, and they’ll want to hear more about it when Federal Reserve Chairman Jerome Powell speaks at a press conference on Wednesday.
“The bond market is still not worried about inflation. It buys what the Fed sells,” said Randy Warren, CEO of Warren Financial.
The problem is that there is a chance that the Fed will wait too long to respond to inflation.
Is inflation temporary or something more structural? asked Stephen Oh, global head of credit and fixed income at PineBridge Investments. Will the Fed lose control of it in the future and make a policy mistake and not have the power to rein it in?
If the Fed and the bond market are wrong about inflation, the central bank may have to end its pandemic stimulus much more quickly than investors would like. That could mean eliminating large asset purchases and raising interest rates sooner rather than later.
Oh I don’t think that would be the case. Many others agree. They argue that investors should keep in mind how quickly the economy will turn back.
For this reason, it should come as no great surprise that there are disruptions in the labor market and the supply chain. It will take time for conditions to return to what they were in late 2019 and early 2020 before Covid-19.
“There are a lot of questions about inflation because you see it in everyday life,” said Brian Koslow, director of Clarus Group, a wealth management firm. “But we may have seen the peak, especially in terms of wage growth.”
Even if this turns out to be true, the mere fact that investors and consumers are so focused on pricing is noteworthy. Inflation has basically not been a problem for more than a decade.
“The Fed needs to take inflation concerns seriously,” said Troy Jeske, co-chief investment officer and senior portfolio manager at SkyBridge Capital. He added that he believes there is a 20% chance that inflation pressures will be more persistent compared to temporary pressures.
“The risk of real inflation has been non-existent since 2008. Until now,” Gaysky said.
What becomes more expensive
Food and paint aren’t the only things getting more expensive. As CNN Business’s Moira Ritter points out, prices for just about everything have gone up lately.
Sawn timber prices soared. The housing market continues to thrive. This led to a significant increase in the prices of sofas and other home furnishings.
Used cars are much more expensive too. Chalk up to people returning to work and a dearth of new cars at many dealerships due to a shortage of chips has hurt production of new cars.
People travel more as well. Airplane prices have risen in anticipation of what some are calling a red-hot vaccine summer.
next one
Tuesday: US retail sales. US producer price index; Earnings From Oracle (ORCL) and H&R Block (HRB) Wednesday: Federal Reserve Rate Decision; Initiation of housing and building permits in the United States; Crude Oil Stocks in EIA; Earnings from Lennar (LEN) Thursday: US unemployment claims; Earnings from Kroger (KR) and Adobe (ADBE).
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