US: Comeback of inflation?
11.05.2021 22:45 - La Financière de l'Echiquier
As each month passes and the economy starts to recover across the Atlantic, price pressures are gradually emerging at a low level. But for how much longer?
Automotive industry with production bottlenecks
A very good example of the mechanisms at work is the car market. The US economic recovery is being powered by a rebound in consumer spending, which in turn is pushing up car market prices – particularly for used models. A shortage of semi-conductors is slowing down manufacturers' production rates and they are unable to meet the demand for new vehicles, prompting private individuals and car rental companies to turn to the second-hand market. Growing demand, supply-side pressure, logistical issues – this triptych of inflation is replicated in other markets.
Strong rise in commodity prices also impacts freight transport
The freight transport market is also under pressure. Supported by a surge in growth but suffering from rising oil prices and an undersized fleet after years of underinvestment, freight costs are soaring. For example, whereas it cost around USD 1,500 to ship a container from Shanghai to Los Angeles before the crisis, it now costs over USD 5,000.
Rising prices are having a knock-on effect on almost all commodities. The days when oil was trading at a negative price seem long gone, but that was only just over a year ago. Oil is currently trading at around USD 65 a barrel in New York – up more than 30% since the beginning of the year. Agricultural commodities and industrial metals are not to be outdone, and almost all have risen by several tens of percent since the beginning of the year.
Price pressure also on intermediate products such as semiconductors
Price pressures are also being felt on certain intermediate goods (products that have been processed but not yet finished). In this area, too, the sudden disruption of production lines last year led to a series of delivery delays – and these tensions are long-lasting in the globalised economy. Any product using semiconductors is affected by production delays and possible price increases.
Real estate market: Inflation signals are accumulating
In real estate, the main pillar of the PCE inflation calculation (the Fed's most closely watched indicator), warning signs are also increasing. Clearly, the Fed's massive liquidity injection is supporting demand. But it is also the thirst for “more, and bigger" driven by the current health crisis that is feeding demand. Equally supportive is a structural trend that we are seeing in all industrialized countries: the phenomenon of “nesting”. Due to the increasing number of separated couples, the number of separated households is also increasing, thus increasing the demand for housing. Faced with this, supply is structurally less reactive given the time needed to build a large number of new homes.
Profiting from the comeback of Inflation
For investors with exposure to asset classes that are sensitive to price rises, the return of inflation could be very welcome. Stocks of companies with strong pricing power or linked to commodity prices, inflation-linked bonds and real estate are asset classes that offer protection against inflation.
By Clément Inbona and Olivier de Berranger
