In a Nutshell: Rapidly Rising Prices Increase Many Concerns

By Ken Herman

As commodities and many materials become more scarce and expensive it appears that increasing inflation may be here to stay.

Rising prices are intensifying inflation realities throughout the economy.  A growing number of companies are warning that supply shortages and increasing demand will result in higher prices.  In fact, tight inventories have already generated price surges for raw materials, ranging from semiconductors and steel to lumber and cotton, as well as dramatically increasing the prices of new and used vehicles and homes.  While manufacturers and builders are scrambling to replenish stockpiles to keep up with accelerating demand (as eager shoppers take out their stimulus-filled wallets) supply is certainly lagging demand.

As commodities and many materials become more scarce and expensive it appears that increasing inflation may be here to stay.  Putting it in perspective, a sheet of 3/4″ plywood at Home Depot is now selling for around $60, up from about $30 before the pandemic – that’s a 100% increase.  Investors and policymakers alike hope that recent price hikes prove transitory, though it’s not likely to be the case considering all of the federal government “hand-outs”.  Treasury Secretary Janet Yellen even made waves last week by suggesting tools that could combat an overheating economy.

“Straight price increases will continue to be an important element as we look at the back half of the year” Colgate-Palmolive CEO Noel Wallace told investors after the company’s Q1 results.  “I anticipate that you’ll see more price increases across the sector, given the headwinds that everyone has faced in this space.” Many other companies have also warned of price increases and supply chain disruptions on their earnings calls, including Apple, Coca-Cola, Proctor & Gamble and Kimberly-Clark.

Bloomberg News says companies ranging from manufacturers to fast food chains are also struggling to find workers, probably due to government programs which pay people not to work. Executives are increasingly blaming stimulus checks and generous unemployment benefits for hampering hiring efforts.  Bloomberg notes that some liberal economists and policy makers may not even realize that these higher than normal benefits are the problem. 

Apparently many people prefer to be unemployed (and receive government payments) than work in fast food or do other less glamorous work, especially when being unemployed pays about the same or more than working (and requires no effort).   While employment incentives may still work, it is being proven that government sponsored disincentives to working appear to be very strong motivators!

America’s inflationary expectations have changed significantly in the past few months!  While the magnitude of this transitory shock may have not been expected, the belief  that the Fed will or can contain the shock is now being questioned.  The Fed never was a producer of miracles.

Capital Markets can also expect inflation from bottlenecks associated with the pandemic and restarting the global economy, compounded by fiscal and monetary stimulus.  Bottleneck inflation is hard to predict, and therefore hard to quantify in advance.  If the market is functioning properly there could be more inflation reflected in the short-term than actually materializes longer term.  How much more is only short-term is tricky to quantify. Also tricky is forecasting when inflation will peak, as well as when traders will figure out when it will peak.

There appears to be an infectious rationale problem traveling throughout the White House.  Spending trillions of dollars – more payouts being talked about everyday – will have long-term negative consequences.  The big picture is being missed, or the intent is to radically change and weaken America’s economy. All this DEBT being created needs to be sold to investors that buy our debt.  China has in past Treasury auctions been the largest purchaser of our debt.  

If China – or other countries for that matter – stops purchasing our debt, interest rates will seek a level where that debt will be purchased.  In other words, interest rates will significantly rise.  More negative consequences will affect the value of our dollar, potentially even eventually bankrupting our country.  Is one solution to significantly raise taxes?  That also has dramatic consequences.  Taking spendable income out of American’s pockets also stifles economic growth.

Robinhood economics will have significant long-term negative consequences.  Redistribution of wealth may sound good to many Americans, but it will come with undesirable side effects.  There is a strangle hold currently brewing in the Capital Markets, and the current White House just does not get it!