Persistently going from one transitory source of inflation to the next may keep inflation elevated for longer than markets currently anticipate.
A rising number of labor strikes hint that workers demanding higher wages could be a next source of inflationary pressure, following the transitory effects of supply shortages and soaring energy prices.
The lift to earnings from inflation may more than offset any compression on stock valuations from any tightening of financial conditions, given the more relaxed inflation mandates of central banks.
If the global economy persistently goes from one transitory source of inflation to the next, it may keep inflation elevated for longer than markets currently anticipate. Following this year’s supply disruptions and recent climb in energy prices, markets may begin to price another potential source of inflation: workers demanding higher wages as strikes blanket the news. Yet, central banks’ attitude toward inflation has changed. This may mean that the lift to earnings from inflation may more than offset any compression on stock valuations from tighter financial conditions.
Supply chain problems may have peaked
It’s a simple law of economics: prices rise when supply cannot meet demand. This year’s post-lockdown re-openings led to a surge in demand, which suppliers have had trouble meeting. Although demand can snap back quickly, supply often takes time to get back up to speed. Bottlenecks at ports have contributed to the shortages. The resurgence of port traffic in August and September led to unprecedented logjams and delays.
While supply shortages pose a risk to third quarter earnings reports which begin this week, they may finally begin to ease now that we are past the seasonal peak in shipping demand. The number of ships waiting at anchor to unload at the U.S.’s busiest ports (Los Angeles and Long Beach) appears to have peaked on September 19, according to data from the Marine Exchange of Southern California. The cost to ship a 40-foot container unit from Shanghai to Los Angeles (the world’s busiest route) is tracking last year’s pattern (though at higher levels) and is now past its peak of a few weeks ago.
Shipping costs echoing last year's pattern