Inflation Is Back
Most economic variables of western economies are reaching record highs in at least a decade. However, rising inflation makes information blurry or even meaningless.
At least since the 2008 financial crisis, the top line performance of economies and companies had been assumed to be real because inflation had been close to zero. Real was true both in terms of economics and colloquially. People could depend on the figures because inflation was not blurring the results.
However, the tide is changing based on individual accounts of businesses even though government statistics are slow to reflect it. This makes all government and private figures difficult to digest and the markets will need to adjust.
As an example let’s take a world without inflation. If people are told that they are receiving a 10% wage raise, they have a reason to be happy and celebrate. However, in a world where inflation is a problem but its value is uncertain, a 10% wage rise is meaningless. A 5% inflation still implies people’s financial situation improves after the wage rise and they should celebrate, but a 20% inflation means people are worse off and the wage rise just lessens the pain. We just don’t know which inflationary world we are in.
Non-aggregate individual accounts of people and companies are painting an inflationary picture.
Anything close to 3 percent is likely dangerous territory for central banks. I would argue that given the evidence below, government data have plenty of headroom to climb in order to reflect the experiences of private businesses.
Data pointing to low or target inflationary environment (yoy):
- “Policy makers expect inflation to run near its symmetric target of 2 percent” (FOMC meeting, USA, 6/13/2018)
Data pointing to high or unexpected inflationary environment (yoy):
Earnings commentary with data pointing to high or unexpected inflationary environment:
Casey General Store (CASY): The average retail price of fuel during this period increased over 13%.
Darden Restaurants (DRI): Restaurant labor was 130 basis points unfavorable last year due to several factors…we continue to see elevated wage inflation of approximately 4%.
Kirby (KEX): In the inland marine transportation business, we saw a positive change in market dynamics during the quarter. Spot market pricing increased approximately 10% to 15%.
Patterson UTI (PTEN): Average rig operating costs per day were also higher-than-expected at $13,970, due primarily to higher-than-expected labor cost.
Chipotle (CMG): The price increases averaged about 5% across the menu. Labor costs for the quarter were 27.8%, 90 basis points higher than last year. Wage inflation of 5%.
Union Pacific (UNP): 5% improvement in average revenue per car drove a 7% increase in freight revenue.
Domino’s Pizza (DPZ): … on food basket inflation, we’re still anchoring to the 2% to 4% for 2018.
CH Robinson (CHRW): First, we are in a unprecedented freight environment. The healthy economy and rapid growth in e-commerce is driving a significant increase in the demand for freight. To illustrate this point, costs in our North America truckload business increased 21.5% this quarter, the largest single quarterly increase in our 21-year history as publicly traded company.
KB Home (KBH): 7% increase in our overall average selling price.
AO Smith (AOS): As a result of significantly higher steel prices and inflation in freight and other costs, we announced a price increase up to 12% on U.S. water heater products effective in early June.
H.B. Fuller (FUL): We have three areas of focus as we enter the second quarter: first will be to realize over $50 million in annualized pricing to offset last year’s raw material inflation
PotlatchDeltic (PCH): In general, I’d say costs are going up in trucking about 10% per year.
Pulte Group (PHM): Our revenue growth for the period reflects the combination of a 10% or $38,000 increase in average sales price of $413,000.
Lowe’s (LOW): We recently announced plans to expand our employee benefits and a one-time bonus of up to $1,000 for our more than 260,000 hourly employees in the U.S
World Fuel Service (INT): Consolidated revenue is up 12% compared to the first quarter of 2017. This increase was principally due to a 22% year-over-year increase in oil prices.
Brinker (EAT): … ongoing market-driven wage rate pressures which continued in the 3% to 4% range
The only data pointing to normal, expected inflation are based on lagging government data or structurally CPI-challenged countries such as Japan and Italy. Slower inflation data are perhaps calming the market now so its response remains relatively subdued. As soon as private business data starts leaking into government numbers significantly, I would expect a meaningful market response similar to that in February.
- Eric Cinnamond: Inflation — Subsiding or Accelerating?
Author website: adamnovotny.com