Since our September issue last year, we’ve been warning readers of the building inflationary pressures — and now the data is beginning to back that up, cautions Jim Stack, money manager and editor of InvesTech Research.
The most recent release of the Core Consumer Price Index (which excludes the volatile food and energy segments) showed an increase of 3.0% — well above the Federal Reserve’s official inflation target of 2%.
This 12-month rate of change in the Core CPI is now at the highest level in over 25 years, while its monthly increase was the largest since 1981!
Confirming the reasons behind this economic strength and re-emerging inflation are the ISM Surveys for both Manufacturing and Services.
The ISM Manufacturing Index (top graph below) is hovering near its recent high, which was the strongest reading since 1983 when the economy emerged from the deep 1981-82 recession. And the ISM Services Index is slightly under its record high from the month before.
Such readings are largely a result of pent-up demand being released after the easing of pandemic restrictions. While that is positive confirmation that the recession is over, it is also creating or exacerbating imbalances that are rapidly spilling into inflationary surprises.
As investors have become increasingly concerned about inflation, the Federal Reserve has given countless reassurances that current pricing pressures will be “transitory” and short-lived. Yet mounting evidence has seemingly turned this debate into the Fed versus the World.
Dual surveys from the Institute for Supply Management are ringing alarm bells, as the ISM Manufacturing Prices Paid Index (top graph) has surged to one of its highest readings on record, led by widespread commodity price increases.
As stated by one respondent to the ISM survey, “In 35 years of purchasing, I’ve never seen anything like these extended lead times and rising prices — from colors, film, corrugate to resins, they’re all up.” Likewise, even in the Service Sector the Prices Paid Index shot higher and is nearing a 25-year high!
Central to the Fed’s “transitory inflation” argument is the belief that supply/demand pressures will quickly subside as inventories rebound. Our concern is that broader evidence suggests inflation could be far stickier than the Fed expects.
As businesses are facing higher input expenses, they are already making plans to pass these costs on to their customers. The NFIB’s survey of small businesses shows that plans to raise selling prices have reached the second highest level since 1981 — a time when inflation was running near 10%.
Perhaps most importantly, business owners are also facing higher wage costs as qualified labor is becoming an increasingly rare commodity. The NFIB reports that a record 44% of small businesses have unfilled positions, and over half of those with job openings reported that there were few or no qualified applicants.
Historically, wage inflation can be notoriously sticky, and the disparity between the NFIB Job Openings and reported Wage Inflation is a gap that will almost certainly be closed in the year ahead.
This casts further doubt on the Fed’s narrative that inflation will surely be “transitory.” And unfortunately for the Fed, wage inflation — once ingrained — can typically only be reversed by a recession.
Anyone who has tried to buy or build a home in the past six months is aware of the rising stresses in the housing market. Home prices are soaring, not only here in the U.S. but on a global basis as well.
History has shown that it will be difficult, if not impossible, for the Federal Reserve to dampen or halt the imminent impact of the red-hot housing market on the economy.
Any cost surprises will undoubtedly be to the upside in the months and year ahead, and that does not bode well for inflation news or for the Fed’s reassurance of “transitory” inflation.