Investors are fretting over inflation. A growing list of businesses are warning that supply-chain bottlenecks, increasing raw material costs and higher labour expenses are beginning to bite.

Manufacturing behemoth 3M Co. has flagged rising air and freight costs to ship its goods, while Walmart Inc. has warned on the congestion in U.S. ports. Mobile home manufacturer Legacy Homes and Williams-Sonoma Inc., have seen an uptick in wage costs. And Barbie Doll-maker Mattel Inc. has warned on the rise in plastics prices, which were exacerbated by the winter storm in Texas that took petrochemicals plants offline.

“Costs are going up everywhere,” said Ted Doheny, chief executive of packaging maker Sealed Air Corp. “It’s DefCon 4 (for) us right now. It’s a big deal.”

These first flickers of inflation — and the fact that many S&P 500 companies say they are responding by raising their own prices — have fed a debate among investors as the U.S. economic recovery accelerates. Are these a signal that the kind of chronic inflation long ago tamed by the U.S. central bank could be about to roar back?

“People are thinking it’s transitory, or maybe hoping it’s transitory,” said Peter van Dooijeweert, managing director of multi-asset solutions at Man Solutions. “Because no one really knows what else to do.”

Central bankers and investors expect inflation to accelerate this year as government stimulus and pent-up demand from more than a year of social curbs pumps up the U.S. economy. One market measure of inflation expectations, the 10-year break-even rate, climbed to its highest level since 2013, reaching 2.36% during the week of March 22. 

Officials with the Federal Reserve have also lifted their inflation forecasts. The Fed’s preferred gauge, the core personal consumption expenditures index, is now expected to reach 2.2% by the end of the year from 1.4% now, according to the most recent Fed predictions. 

The Federal Reserve expects GDP growth in the U.S. to hit 6.5% this year. The U.S. Department of Commerce already noted a 2.4% month-on-month increase in consumer spending in January, up from a 0.4% for December. 

Aluminium, copper, oil and lumber have all surged in recent months, with the latter trading near all-time highs. U.S. oil prices are now hovering around US$60 per barrel. The cost for polyethylene, a widely used plastic, has risen roughly 20% between last year’s fourth quarter and mid-March, according to supply chain data provider Panjiva. Surveys from regional branches of the U.S. Fed have shown manufacturers are pencilling in large commodity price increases over the next six months.

“Every commodity that we buy, or many of the commodities we buy, we’re having price increases,” Curtis Drew Hodgson, the co-founder of Legacy Homes, told investors. “We’ve even had to give labour increases because just to get people to come to work, we pay them now US$1 an hour more if they just come to work, in addition to their wage.”

Markets have been jittery about the prospect of resurgent inflation, given it eats away at the interest bonds pay and cuts into the present value of companies’ future cash flows. The yield on the U.S. 10-year Treasury briefly jumped past 1.7% in March, before retreating in the last week of March. That is the highest level in 14 months. Meanwhile, the tech-heavy Nasdaq Composite has tumbled more than 6% from its all-time-high struck in February.

It is not yet clear to corporate America whether the increased prices will abate as production of raw materials increases. Vivek Sankaran, chief executive of grocer Albertson Inc.’s, said while inflation would be above trend in the first half of the year, it would drop back to 1% to 2% towards the end of 2021.

And Aaron Ravenscroft, who runs crane manufacturer Manitowoc Co., added that clogged U.S. ports had caused “prices to go bonkers.” But he noted that the issue had eased somewhat.

Jay Powell, the Fed chair, has so far dismissed rising prices, expecting them to be transient and likely to fade as the recovery persists. He told Congress that policymakers saw the resulting impact on inflation as “neither particularly large nor persistent.”

Some investors are reluctant to agree so quickly. Whether the resounding price increases led by higher commodity prices will be a “transitory reset” or mark a permanent move higher in inflation “is not really clear at this point”, said Kathryn Kaminski, chief research strategist at AlphaSimplex Group LLC. “That stuff takes a while to kind of trickle down, but it is sounding some alarms.”

Source: Financial Post