Market Insights

Wall Street is starting to worry about inflation as the economy reopens from last year’s pandemic amid a shortage of commodities and surging demand.

Famous investor Warren Buffett and the Institute for Supply Management were the latest to spot the trend. Buffett, CEO of Berkshire Hathaway (BRK.B) told investors over the weekend that “we’re seeing very substantial inflation.” He added the cost of commodities like steel are “going up, up, up” and that higher prices “are being accepted.”

“In April, for the second month in a row, all 18 industries reported paying increased prices for raw materials,” the Institute for Supply Management (ISM) reported in its purchasing managers index yesterday. The industry group cited “wide-scale shortages of critical basic materials” and “limited “availability of parts and materials.” It also said factories are struggling with “worker absenteeism” and “short-term shutdowns due to part shortages.”

Those stories follow announced price increased by companies like Procter & Gamble (PG) and Coca-Cola (KO). It also comes after months of skyrocketing home-price appreciation and semiconductor shortages. The S&P CoreLogic Case-Shiller housing index rose 12 percent in February (the most recent month available), its biggest gain in 15 years.

The Wall Street Journal also reported on Sunday that retailers face a surge in shipping costs from truckers. Corn prices hit a seven-year high last week on supply concerns. Factset additionally noticed on April 23 that companies cited “inflation” concerns on their earnings calls the most frequently since at least 2008.

Consumer Price Index

While these items may get a lot of attention, they haven’t yet fully impacted inflation measures like the consumer price index. One reason is that other categories — like airfares, clothing and medicines — have gotten cheaper. March’s official CPI number, for example, rose just 0.6 percent. However other numbers showed more inflationary pressures. The trailing three-month increase for import prices (up 4.1 percent) was the highest reading in a decade.

Thursday’s gross domestic product report (GDP) also showed consumer prices up 4.1 percent in the first quarter. That was more than twice the 1.9 percent expected by economists.

Inflation and the Federal Reserve

Normally, the Federal Reserve raises interest rates when inflation increases. However, the central bank has committed to keeping them low so the economy can recover from the coronavirus pandemic. Chairman Jerome Powell has called the upward pressures “transitory” and pledged to keep policy super-accommodative well into the future.

The stock market mostly accepted that approach when businesses were still shut down. But recent weeks have brought announcements of New York, California and Texas reopening. Jobless claims have also dropped to their lowest level since the pandemic triggered mass layoffs a year ago.

This week the stock market seems to be waking up to inflation. Energy producers, which benefit from higher oil prices, rallied. Transportation companies, which can charge more for shipping, hit new highs. Industrial metals and precious metals, common inflation hedges, are also starting to outperform. Meanwhile software, technology and alternate energy are lagging. This is consistent with a pattern that appeared earlier in the year when investors pivoted to “value” stocks and away from “growth.”

“The Fed is pinning itself in a corner by insisting this is transitory,” famed economist and investor Mohamed El-Erian told CNBC yesterday. “But I fear that this is persistent, this is not transitory.”

If he’s right, it would mark a big change from the trend of the last decade. Keep reading Market Insights for more on the this apparent shift, and what it could potentially mean for your portfolio.