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CEOs Underscore Inflationary Risks

CEO comments during earnings season continue to stress inflationary risks. Tight supply chains and rising commodity prices are driving higher prices. While policy makers expect inflation to be transitory, many CEOs appear to take a different view, expressing concern about inflationary trends.

Earnings Season Comments

While price spikes in commodities such as lumber and oil have eased somewhat, supply chains remain tight. For example, coffee prices have recently hit a six-year high. These cost pressures are being closely monitored by CEOs as they report earning.

UPS is paying “close attention to” inflationary pressures. Earlier this month, Jamie Dimon, CEO of JPMorgan Chase
JPM
said, of inflation, “I think it will be a little bit worse than what the Fed thinks.” Larry Fink, CEO of BlackRock
BLK
has echoed those comments stating his concerns about inflation.

Policy Makers’ Views

No one disputes the current high rate of inflation, especially in the U.S., where inflation is running at around 5% on July data. Indeed, earnings season is somewhat backward looking, as companies are primarily reviewing April to June financial performance. However, the question remains as to whether inflation will be transitory, which is to say, it may start to taper off over the coming months, and into 2022. President Biden and the Fed have both come down in favor of the transitory inflation narrative. That may be the best outcome for the Fed. However, CEOs are not so optimistic.

The Market Reaction

Inflation is a central theme for markets. Investing almost always involves paying a fixed price now for future cashflows. If inflation remains elevated, then those future cashflows may be worth less in purchasing power terms, than expected. As such historically, elevated inflation has often lead to reductions in asset values almost across the board.

The bond markets appear to show little concern over inflation. The yield on the U.S. 10-year Treasury hovers at a little over 1%. If inflation remains closer to 5%, or even over the Fed’s stated goal of 2%, then investors in bonds could end up falling behind relative to inflation. Therefore, the bond markets are expressing limited inflation concerns today. Stocks too remain close to all-time highs, again signalling a relaxed attitude to current inflation.

As we get closer to August data those who believe in transitory inflation will expect to see some signs that inflation is abating. This may occur as we start to compare against firmer pricing from 2021. However, if it doesn’t, then as CEOs and other have suggested, then maybe inflation will be less transitory than many hope.

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