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Two Tales of Inflation

Stock MarketsSep 26, 2021 12:30PM ET
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© Reuters. Two Tales of Inflation

Inflation, the old villain of the American economy, is back, raising a great deal of anxiety on Main Street and Wall Street. In the last twelve months, interest in U.S. inflation has climbed from 28 to 48 on the Google (NASDAQ:GOOGL) Search scale.

Is this anxiety justified? It depends on which of the two stories circulating the social and the mass media got the inflation problem right: the Fed's story, or the business story.

Fed's Story of Inflation

The Federal Reserve story argues that the recent rise in inflation is a transitory problem. It’s caused by a structural shift in consumer demand from services to commodities, and supply chain bottlenecks, which prevent the supply-side economy from catching up with demand.

Meanwhile, the Federal Reserve thinks that the economy is still well below maximum employment, meaning that there’s plenty of slack in the labor market, which will keep labor costs and inflation under control.

The trouble is that the Federal Reserve has avoided defining explicitly what maximum employment is. Plus, the current reality where businesses have difficulty finding workers runs contrary to what the Fed thinks, as discussed below.

The Fed also points to tame breakeven inflation, a measure of expected inflation derived from 10-Year Treasury Constant Maturity Securities (BC_10YEAR) and 10-Year Treasury Inflation-Indexed Constant Maturity Securities (TC_10YEAR). The latest value implies what market participants expect inflation to be in the next 10 years, on average. On September 24, the breakeven inflation was 2.34 percent, not that far above its 2 percent target.

Business' Story of Inflation

American corporations argue that inflation is a permanent problem, as higher prices in the supply chain and higher wages begin to take their toll on their top and bottom lines. As a result, they are forced to pass on these higher costs to their customers.

For example, Costco (NASDAQ:COST) said it’s been facing accelerating prices across a range of products in May, including shipping containers and aluminum foil, as well as a 20% spike in meat prices over the previous month.

Last week, the big-box club chain Chief Financial Officer Richard Galanti called freight costs “permanent inflationary items.”

Meanwhile, FedEx (NYSE:FDX) has announced a 5.90 percent shipping rate hike across most of its services, the first significant increase in ten years, to deal with the situation. That could set a price hike spiral, as FedEx customers will pass these price hikes on to their customers.

Then there are Lennar (NYSE:LEN), D.R. Horton (DHI), General Mills (NYSE:GIS), and Nike (NYSE:NKE), all of which are reporting cost pressures affecting their business negatively.

The bottom line: there’s a fine line between temporary and persistent inflation that has been crossed, at least as far as the nation’s businesses are concerned.

Disclosure: At the time of publication, Panos Mourdoukoutas has positions in Costco, Nike and Fedex.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates, and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices or performance.

Two Tales of Inflation

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