No doubt about inflation, and we think no doubt about a boom, either.
Inflation: The only direction for inflation is up, ING Economics notes, expecting it to soon get close to 9% as businesses surging commodity and labor costs get passed onto consumers. ING expects six — yes, six — 25bp Fed Funds increases this year.
The U.S. consumer price index in February rose 0.8% from January, which leaves the annual rate of inflation at 7.9%, a new 40 year high. Food rose 1% and energy was up 3.5% so stripping this out this gives core inflation of 0.5% in one month or 6.4% year over year. All this is exactly in line with market expectations.
Washington has highlighted supply chain disruptions as it has attempted to ignore the obvious — that inflations is at a 40 year high. Many economist say Russia’s invasion of Ukraine is fueling inflation, as war always has, but Charles Goodhart, an influential economist, says there’s another problem: an era of inexpensive labor is giving way to years of worker shortages. And worker shortages by themselves will drive prices higher.
“The coronavirus pandemic will mark the dividing line between the deflationary forces of the last 30 to 40 years and the resurgent inflation of the next two decades,” economist and former UK central banker Charles Goodhart told The Wall Street Journal in an interview. He predicts inflation in advanced economies will settle at 3% to 4% around the end of 2022 and remain at that level for decades, compared with about 1.5% in the decade before the pandemic.
Boom: Higher prices will inevitably lead to higher wages for workers. For those already established, this will be a bonanza as they watch the value of their house and other assets rise. But what about the consumer economy? Two things, we think:
First, more production will return to the U.S. as executives ponder the lessons of the last three years. Relying upon producers overseas means the enterprise is liable to supply disruptions that upend the best laid plans, and one cannot rely upon foreign leaders to “behave responsibly.”
A just-released survey by PNC Financial Services Group found that small business owners see supply chain disuptions easing in six months, but plan to raise prices. Indeed, half (51%) of businesses surveyed expect to increase the prices they charge in the next six months, with 36% expecting hikes of 5% or more. Nearly two in 10 (16%) of those expecting to increase prices plan to raise them by at least 10%, more than double those respondents who anticipated a similar move last fall (6%). One in three (34%) say their prices already have gone up in the past six months, with four in 10 hiking them by 5% or more.
Second, there will be renewed emphasis on reducing labor inputs, because workers will be hard to come by. Firms will also welcome back older workers, and not simply as greeters in retail megastores. Workers who previously would not have been hired, such as those with a criminal background, will get the opportunity to gain responsible jobs. For inner cities, this could be a good thing, reducing crime dramatically.
All these rehired or new workers will buy things, and their purchases will lead to a boom for the rest of this decade.
What about the beverage industry? We think all this spells good news for the beverage industry and for the hospitality industry. People will be able to afford good alcohol beverages, and to eat out or take nice vacations . . . as long as their wages keep up with inflation.