What’s happening: Companies that make consumer goods are announcing price increases left and right. Faced with persistent higher costs, they don’t expect the situation to moderate any time soon.
“Inflation will continue to be a key theme for the remainder of this [year] and for next year,” Unilever CEO Alan Jope recently told analysts.
“The situation has not improved,” Nestlé CEO Mark Schneider said. “If anything, we’re seeing further downsides compared to what we told you in the summer.”
The problem: It’s costing more to make products as supply chain bottlenecks and huge demand for goods push up the price of raw materials. Higher wages needed to address labor shortages, increased shipping fees and a surge in energy prices are also adding to expenses.
That puts pressure on manufacturers to charge more when selling to stores. Those retailers then have to decide whether to pass higher costs on to customers. Many will.
For the better part of the year, economists, investors and policymakers have debated whether inflation is a passing phenomenon that will ease as the pandemic recedes or a more permanent state of affairs.
Many executives are starting to move away from the idea that it’s “transitory,” as the US Federal Reserve has maintained.
Some central bankers are beginning to change their language, too.
“I would not be shocked — let’s put it that way — if we see an inflation print close to or above 5% [in the months ahead],” Huw Pill told the Financial Times. “And that’s a very uncomfortable place for a central bank with an inflation target of 2% to be.”
Pill declined to reveal how he would vote at the Bank of England’s next meeting in early November, but he said that the question of whether the central bank should hike interest rates from 0.1%, where they’ve been since the start of the pandemic, is “live.” Central banks use interest rates to maintain price stability.
Bank of England Governor Andrew Bailey said earlier this month that the central bank would “have to act” in response to surging prices. He said he continues to “believe that higher inflation will be temporary,” but acknowledged it could last longer than previously thought as a result of the spike in energy prices.
Tech stocks have been on the upswing. Will it last?
Quick rewind: Wall Street, thinking central banks could become more aggressive in plans to roll back pandemic-era support for the economy, ramped up selling of government bonds, pushing yields higher.
That hurt shares of tech companies. When yields on government bonds are extremely low, it tends to boost interest in riskier investments that offer better returns. The valuation of tech companies is also tied to future earnings, which look less glossy when inflation and higher rates enter the picture.
Concerns have been pushed aside for the time being. Tech shares have regained ground in recent weeks as investors look ahead to the latest batch of corporate earnings.
Now, it’s down to the results.
As the five largest members of the S&P 500, whether they can maintain rapid levels of growth will have big consequences for the broader market.