Shortages And Labour Constraints Suggest Inflation May Stay Longer Than Expected

Soaring gas prices, labour shortages and a lack of ships are putting the view that inflation will be transitory to the test. While central bankers are confident that inflation will fall, they are beginning to acknowledge that it may remain higher for longer as a variety of factors drive up the cost of goods and services, raising future inflation expectations.

"[my business contacts] typically say 'don't worry my company's going to be profitable because I am going to raise prices and we've had no difficulty raising prices in this environment," St. Louis Federal Reserve Bank President James Bullard by Reuters

Gas, Chips, Food And Pollution

Gas prices in Europe and the United States have risen by more than 350 percent and 120 percent, respectively, this year. Oil is up over 50%, and Goldman Sachs predicts Brent oil will approach $90 per barrel by the end of 2021, up from approximately $80 now.

  • Because of decreasing U.S. output, growing costs of carbon emissions permits for polluters, and restrictions on the use of dirtier fuels, many economists believe higher gas prices are here to stay

Semiconductors, often known as chips, are little yet have a large influence on worldwide manufacturing. Chip costs have increased, and Taiwanese semiconductor giant TSMC is considering future price increases of up to 20%.

  • Everything from gadgets to vehicles and phones to washing machines will be affected. Chipmakers, on the other hand, are facing increasing input prices, from commodities to power

According to a UN Food and Agriculture Organization index, global food prices climbed 30% year over year in August, indicating increasing pricing pressures.

  • While increased agricultural commodity prices are to blame, JPMorgan analysts also blame pandemic-related factors such logistical interruptions and transportation costs for the increase

BENCHMARK'S TAKE

  • Combined with a recovering U.S. manufacturing and labour market, inflation may be here to stay longer than expected as savings-rich consumers open their wallet after 18 months of pandemic-linked restrictions
  • Stricter anti-pollution regulations increase energy costs for manufacturers in China and these price increase are then passed on to U.S. and European consumers
  • Moreover, rising commodity and labour prices in China and other manufacturing hubs may suggest that this exported inflation is here to stay and may lead to a period of stagflation in the U.S. and other developed economies as price rise but growth stays low
  • We therefore expect volatility to remain elevated in the coming months as investors try to find a balance between inflation related news and a return to normalcy post-COVID
  • We also expect technology stocks to be pressured in the coming weeks and will be looking for an entry point into tier-1 technology names such as Elastic, MongoDB, Square and Twilio

Disclaimer

Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

Credits

Photo by Madison Kaminski on Unsplash.