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3 events point to one conclusion about inflation

·Editor focused on markets and the economy
·3 min read
In this article:
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This article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe

Wednesday, November 17, 2021

Resilient demand, spending mean persistent inflation

First, with the accumulation of so many dour headlines about the economy, credit should be given where it's due.

Tuesday’s news cycle saw Walmart (WMT) torch Wall Street’s third quarter earnings estimates as penny-counting shoppers flocked to the discount retail giant in droves before the holiday rush. Meanwhile, October’s retail and industrial data both checked in at unexpectedly strong levels in the face of doom and gloom over growth.

Taken together, all three events suggest something rather clarifying about our current moment. And as much as it pains us here at the Morning Brief to be bearers of bad news, the conclusion reached isn’t entirely encouraging.

It still remains to be seen whether the current environment is heralding the dreaded beast of 1970s-style stagflation, especially with the economy facing headwinds from the supply crisis and the COVID-19 pandemic. 

Even with government stimulus waning, consumers continued to spend last month at a clip of 1.7% month-over-month — considerably bigger than anticipated — while manufacturers cranked up output by over 1%, the highest levels since before the pandemic.

Walmart's earnings, retail and industrial spending all reveal the dirtiest secret about both rising prices and the supply crisis: Demand from consumers and companies alike remains scorching hot.

It’s what's kept the labor market propped up, and allowed workers to voluntarily depart their jobs in droves for greener pastures. In addition, as business scribes like TKer’s Sam Ro have pointed out, inflation hasn’t yet hollowed out corporate America’s bottom line.

Which brings us to the bad news I alluded to earlier. The consumer’s willingness to absorb higher prices, and the fact that higher costs haven’t (again, at least not yet) undermined profit margins means much of the inflationary pressures we see are unlikely to evaporate.

In a wide-ranging conversation with the Morning Brief about where the supply chain crisis is headed, Ethan Karp, CEO of Manufacturing Advocacy and Growth Network (MAGNET) explained that the longer-term solution will involve sorting out how much of the current bottleneck can be resolved, and how much is “permanently screwed up.”

However, one thing appears all but certain: Prices are more likely to head higher than normalize.

According to Karp, inflation is partly attributed to “the cost of goods incorporating the risk premium to account for resiliency” in the economy.

If you run a business, “right now you’re passing along inflation costs because your products are costing more,” Karp explained, and are a response to supply and demand.

But even if the system bottlenecks revert to the mean, as a business “you’re not going to go back and reduce your prices for consumers.”

Companies are more likely to invest in redundancies and solutions to blunt potential supply shocks in the future, and “bake that into their cost structure” going forward, he added.

All of which suggests that the surging costs we currently face will be far stickier in 2022 and beyond — and that the mirage of tame inflation we enjoyed before COVID-19 may have dissipated for good. Get used to paying more for that gallon of milk, the Thanksgiving turkey, or — if you're like my colleague Brian Sozzi — that choice cut of steak.

Again, don’t shoot the messenger.

By Javier E. David, editor at Yahoo Finance. Follow him at @Teflongeek

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