What happens when companies expect inflation to persist

In its new Economic Policy Survey, the National Association for Business Economics found that US businesses believe the Fed should act more quickly to control inflation.

Nearly 4 in 5 survey respondents expect inflation to remain above 3% until the end of next year, including 36% who consider it ‘very likely’ inflation is higher than it is projected to be through the end of 2023. expectations about their future costs, and this has ramifications on decisions about pricing, hiring and wages, and investment in personnel, technology and equipment.

“I think people tend to extrapolate the current environment far into the future, and with inflation it’s hard to know when things are going to change. They seem to keep getting worse,” said Melissa Brown, global head of applied research at the financial analysis company Qontigo.

At the economic association’s policy conference on Monday, Federal Reserve Chairman Jerome Powell acknowledged the elephant in the room, using more blunt terms than in the past.

“Inflation is way too high,” he said in prepared remarks. “It is clear that there is a need to act quickly to bring the monetary policy stance back to a more neutral level.” Powell also said the Fed could consider interest increases above a quarter of a percentage point, the increment by which it typically raises rates.

Russia’s invasion of Ukraine added fuel to the inflation fire. More expensive oil, fertilizers and other commodities contribute to the rising costs of food, transportation and other expenses that consumers face. It also creates higher costs for manufacturers and some service industries, such as travel.

A low plurality of 47% of survey respondents expect geopolitical volatility to reduce global economic output by more than half a percentage point this year, including 8% who expect the global gross domestic product falls by more than 1 percentage point as a result. And nearly 80% of respondents said Russia’s invasion of Ukraine would worsen supply chain bottlenecks.

“The reasons that cause inflation are not going away anytime soon. One is the supply chain. There are still about 50 ships off Los Angeles, [and] delivery times continue to deteriorate,” said Dan North, senior economist at Euler Hermes North America.

Survey analyst Ken Simonson, chief economist for the Associated General Contractors of America, said: “This is going to put additional pressure on businesses, as well as difficulty in filling orders. At this point, this will put additional pressure on prices.

Companies also have to deal with scarcer and more expensive labour, as well as components and raw materials. “The other thing that’s not going away anytime soon is the labor shortage,” North said. Some large-scale demographic changes, such as a drop in immigration and the retirement of baby boomers, will keep the labor supply tight for the foreseeable future.

“As long as customers continue to come through the doors, many employers continue to express intense demand for workers,” said Julia Pollak, chief economist at ZipRecruiter, who commented on the latest job openings and demand survey. staff rotation, known as JOLTS.

“The most recent figure from the JOLTS report and the jobs report suggest this is the tightest jobs market ever,” Pollak said.

Just 214,000 workers filed initial claims for unemployment last week, and layoffs are near record highs. Economists say this will help maintain wage gains for workers – but it is much less certain that these gains can outpace, or even keep pace with rising prices.

“So far, inflation is outpacing wage growth, but not for everyone,” Pollak said.

The good news is that corporate balance sheets have held up well – surprisingly, in some cases – two years into the coronavirus pandemic. Labor shortages have prompted investments in equipment and technology related to automation and other ways to improve productivity, which can help offset the higher wages companies pay. to compete for the workers.

“I don’t think the expected further rise in interest rates and the expected continued inflation are yet at a point to stifle business investment,” Simonson said.

Companies have been able to absorb or pass on their higher costs to customers without much hindsight, but experts warn there are limits to what Americans are willing or able to pay for goods and services.

“We are already hearing rumblings of people believing that companies are taking advantage of the situation, thinking that they are raising prices to increase profits but not to increase wages, for example,” Brown said. “Companies will have to be careful not to deprive themselves of customers.”

Although households are still sitting on historically high levels of cash, the cushion is rapidly shrinking, especially for workers and low-income families. And the momentum of consumer spending depends on people’s ability to get and keep jobs.

“As long as we see a strong economy and stable or rising employment, consumers can probably hold out for a while,” Brown said, but it feels like a balance. fragile, especially as interest rates rise and Americans have to pay more to borrow than to spend money.

“There is a fine line between fighting inflation and causing a recession that central banks are walking,” she said.