Economics
Inflation Risk Intensifies With Supply Shortages Multiplying
May 4, 2021, 11:00 PM GMT+2 Updated on May 5, 2021, 7:58 AM GMT+2
- Raw materials surging across tighter markets amid recovery
- Consumer prices rising as manufacturers pass on higher costs
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0:13/Duration 3:07Loaded: 0%Progress: 0% CaptionsShareFullscreenInflation Risk Intensifies With Supply Shortages MultiplyingUnmuteWATCH: More and more consumer-facing companies are warning that they may be forced to raise prices. Michelle Jamrisko reports.LISTEN TO ARTICLE6:28SHARE THIS ARTICLE
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Discover what’s driving the global economy and what it means for policy makers, businesses, investors and you with The New Economy Daily. Sign up hereSigns of inflation are picking up, with a mounting number of consumer-facing companies warning in recent days that supply shortages and logistical logjams may force them to raise prices.Tight inventories of materials as varied as semiconductors, steel, lumber and cotton are showing up in survey data, with manufacturers in Europe and the U.S. this week flagging record backlogs and higher input prices as they scramble to replenish stockpiles and keep up with accelerating consumer demand.As commodities become increasingly expensive, whether faster inflation proves transitory -- or not -- is the biggest question for policy makers and markets. Rising prices and the potential for a response from central banks
topped the list of concerns for money managers surveyed by
Bank of America Corp.
Breakeven Boom
Commodities inflation is reflected in the front end of the bond market
Source: Bloomberg
Many economists and central bankers, from the
Federal Reserve on down, maintain that price gains are temporary and will be curbed by forces such as virus worries and unemployment. Investors remain skeptical, with businesses including
Nestle SA and
Colgate-Palmolive Co. already announcing they’ll need to raise prices.
U.S. Treasury Secretary Janet Yellen, a former Fed chair, entered the debate on Tuesday when she
ruffled markets with the observation that rates will likely rise as government spending ramps up. She
later clarified she was neither predicting nor recommending an increase.
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The Bloomberg Commodity Spot Index, which tracks 23 raw materials, has risen to its highest level in almost a decade. That has pushed a gauge of global manufacturing
output prices to its highest point since 2009, and U.S. producer prices to levels not seen
since 2008, according to data from
JPMorgan Chase & Co. and
IHS Markit. JPMorgan analysts also estimate non-food and energy import prices in the biggest economies rose almost 4% in the first quarter, the most in three years.
“Risk clearly leans to the upside in the current environment,” said John Mothersole, pricing and purchasing research director at IHS Markit. “The surge in commodity prices over the past year now guarantees higher goods-price inflation this summer.”
The IHS Markit analysis across oil, chemicals, steel, copper, zinc, lumber, pulp and rubber expects the price boosts to fade closer to the end of the year. Meanwhile, strategists at Blackrock Investment Institute wrote Monday that they see U.S. consumer-price increases averaging just under 3% from 2025-2030, though that pace is “still under-priced by markets.”
The case for higher-for-longer inflation into 2022 often rests on the trillions of dollars being pumped into infrastructure projects globally in a low-interest rate atmosphere, most notably
in the U.S. That has supercharged a rally across raw materials, as major economies recover from the pandemic amid growing signs of shortage across several markets.
Some businesses have found they can’t afford to wait for “temporary” increases to pass. That means consumers can expect to deal with higher costs for a range of daily items, including
garbage bags and children’s clothes.
“Straight price increases will continue to be an important element as we look at the back half of the year,” Colgate-Palmolive Chief Executive Officer Noel Wallace said late last month when the company announced earnings. “I anticipate that you’ll see more price increases across the sector, given the headwinds that everyone has faced in this space.”
Higher cotton prices from Chinese producers are pushing clothes-maker
Carter’s Inc. to consider how much of the increase it can pass along.
Pricier Cotton
The fabric is still more expensive than usual after recent swings
Sources: ICE Futures U.S., Bloomberg
“We’re beginning to see signs of inflation in product input costs, particularly those related to fabric,” Chief Executive Officer Michael Casey said on an April 30
earnings call. The company will offer “fewer promotions” this year, he said, amid a return of resilient shoppers buoyed by stimulus payments.
Corn, too, is on the growing list of commodities seeing price boosts. Futures
surged this week above $7 a bushel for the first time in more than eight years on the Chicago Board of Trade, alongside increases for soybeans and wheat.
The premium on near-term deliveries over future deliveries for commodities tracked by the Bloomberg Commodity Index has jumped to the highest in more than 15 years,
signaling immediate physical shortages across different markets, Sharenow said. He sees the price surge this time as more organic, rather than the kind of anticipatory demand seen from 2005 to 2008.
Brent Climbing
Oil keeps up its steady rise from late 2020 amid bets on re-opening
Sources: ICE Futures Europe, Bloomberg
Edward Robinson, deputy managing director and chief economist at Singapore’s central bank, said in a speech last week that he’s
watching Chinese producer prices closely as an “important upside risk” to his baseline call that inflation should stay in check, helped by labor-market slack.
A surge in copper is
crippling some Chinese manufacturers, who have idled units, delayed deliveries and even defaulted on bank loans, data from a Shanghai Metals Market survey show. That’s already rippled through the production chain, delaying projects by power grids and property developers.
Copper Rally
Prices for the metal have surged to highs unseen in almost a decade
Source: London Metal Exchange, Bloomberg
Lumber has been in the spotlight as
red-hot housing markets, especially in advanced economies, are driving up costs for the commodity.
Fed Chairman Jerome Powell said last week the central bank was watching that market closely, even though he doesn’t currently have financial stability concerns around housing. Still, the sector has been emblematic of the K-shaped recovery, with cost surges pricing out middle-income buyers while homeowners reap gains.
Look Out Below
Lumber extends a record run in prices amid surge in housing demand
Sources: Chicago Mercantile Exchange, Bloomberg
Markets have responded more calmly of late to the Fed’s mantra, with bond yields little changed after Powell last week doubled down on his inflation read and still-easy policy stance. The inflation run across so many materials, though, could break that patience, as pressure builds on businesses and officials to ward off price increases for consumers.
“One always has to be careful not to overplay a few anecdotes, and project that onto the broader economy,” Douglas Porter, chief economist at
BMO Capital Markets, said in a May 1 report. “But as the anecdotes accumulate, they eventually become data.”
Porter pointed to a sampling of 10 recent datasets, including U.S. employment costs, Canadian wages and still-soaring shipping costs.
“As rising inflation risks suggest,” he said, “when you run things hot, you risk getting burned.”
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