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Leaders of the top US industrial companies gathered virtually for the annual Morgan Stanley Laguna conference. Unsurprisingly, much of the discussion centered around the rising cost of raw materials, labor and logistics and the increasingly difficult challenge of getting enough supply to keep up with demand. “The inflation is unprecedented,†3M Co Chief Financial Officer Monish Patolawala said at the conference, warning that the impact from higher input and freight prices on its 2021 earnings would now be at the higher end of the range the company gave in July. Trane Technologies Plc’s CFO Chris Kuehn echoed the sentiment: “Unprecedented is the word we’d use around the inflation side,†he said. After a series of similar presentations, Morgan Stanley analyst Josh Pokrzywinski joked that attendees could check the word “unprecedented†off their bingo cards.
Of course, the current level of inflation isn’t unprecedented — it is notable, though. The Federal Reserve Bank of Cleveland compiles a median measure of US consumer prices in an effort to give a better snapshot of true underlying inflation. This gauge increased in August at the fastest monthly rate since early 2007, suggesting that consumer prices as a whole are continuing to march higher even as more dramatic escalations in used-car and airfare costs are tempering.
Whichever way you choose to slice and dice consumer price data — and there are many ways to do so and arrive at wildly different conclusions — no benchmark is even in the same zip code as the out-of-control inflation of the 1970s. Inflation doesn’t need to be unprecedented to have meaningful consequences for the economy and markets. The stickiness of price increases is in some ways as much about perception and expectations as it is about the underlying numbers. And on that front, manufacturing CEOs are speaking a completely different language than investors, who on the whole appear to be betting that the rise in costs is a short-lived phenomenon tied to pandemic disruptions.
—Bloomberg