In Western economies, few people have worried about inflation since the 1980s. Indeed, over the past decade, the biggest concern of central bankers has been that prices are falling. But some indicators are finally starting to flash red.
A heady mix of slowly reopening Western economies, supply chain bottlenecks, and aggressive US fiscal and monetary policy could come together and create what many see as a dangerous cocktail for consumer prices. .
Over the weekend, we had more data indicating that these concerns were materializing as summer approached.
First, at Glastonbury, Capitalism, Berkshire Hathaway’s annual general meeting in Omaha, Nebraska, CEO Warren Buffett commented on some of the pricing dynamics that the insurance and industry conglomerate has experienced in recent times. As a reminder, Berkshire’s trades include railroads, low-cost housing and metal fabrication, and it employs nearly half a million people. So the company’s reading of inflation should be taken more seriously than, say, a crypto-bro armed with an M2 chart.
Here is the key quote from Buffett:
We are seeing very high inflation. . . It’s very interesting. We are raising the prices. People are pushing us up on prices and it is accepted.
We have nine home builders in addition to our manufacturing houses and operations, which are the largest in the country. So we really do a lot of housing. Costs are just up, up, up. The costs of steel, you know, they’re going up every day.
The larger manufacturing base in the United States echoes this message. In the ISM manufacturing PMI data released on Monday, the price index rose for the 11th consecutive month and hit its highest levels since July 2008, just before the onset of the financial crisis.
The prices of raw materials seem important. The FT noted on Monday that there was talk of brewing a fresh produce supercycle, with iron ore, copper and palladium all reaching new heights due to growing demand for consumer electronics and electric cars. Meanwhile, lumber continues to cover (sorry) thanks to bottlenecks in sawmills, a decade of underinvestment, and unprecedented demand for homebuilding and renovations in the United States. And so are raw materials: corn hits $ 7 a bushel due to a persistent drought in Brazil that threatens the harvest, while soybeans are also near an all-time high.
Is it important in the long run? We are still not convinced that this is anything more than a temporary phenomenon. Labor markets are far too weak to bring us to a place where we are seeing substantial wage growth. It was a wage price spiral, where higher wages drove companies to raise costs, which led to the persistent inflation seen in the 1970s and 1980s in places like the UK and the States. -United.
As Oxford Economics noted in a eurozone note today, a combination of high unemployment, workers on leave and falling participation rates have weakened workers’ bargaining power. While wages will go up this year and next year, it is after a large drop in take-home pay for many people in 2020.
While the US recovery will likely be faster thanks to Biden’s fiscal policy, we don’t expect Jay Powell to blink his eyes on rising inflation over the next few months. Grandmaster Jay reiterated Monday that the Fed will not remove the punchbowl until the most disadvantaged in the labor market see their prospects improve. There is still a long way to go in this area. As Powell noted, the recession has not fallen evenly on all Americans, and those least able to shoulder the burden have been hit hardest by the pandemic.
This position will become all the more difficult to maintain as more and more inflation data comes in over the summer.