The Federal Reserve has shifted to a more hawkish stance, as expected, but the Fed’s outlook for PCE inflation and core PCE inflation remain overly ‘optimistic’.
The unwind of many pandemic-related price increases has proven to be short-lived. The annual increase in the Manheim Used Vehicle Index, for example, has jumped back up to 48.9% as of this month. It is a similar story with construction costs. The RoMac Whole House Commodity Index has turned up again on the back of the dramatic rebound in lumber prices.
But it is not just wood prices that are pushing up housebuilding costs: “What is even more concerning is the announced price increases from manufacturers throughout the building material supply chain for January. Announced increases are anywhere from 15 percent to 30 percent as all sectors report much higher costs for labor, raw materials, and shipping.”
In short, price pressures are becoming more widespread across the supply chain and are no longer confined to singular inputs. Housing construction costs may be a harbinger for what is to come in 2022.
Freight rates were falling, but the declines have now stalled too. Companies are bracing for further sharp increases in shipping and logistics costs.
Even if 2022 price increases fail to match those of 2021, they will not come down fast enough to justify the Fed’s current forecasts. Companies will have to contend additionally with rising labour costs. The US is nearing full employment. The 4-week average for initial jobless claims dropped 16k to 203.75k in the week ending December 11th, the lowest level since November 15th, 1969.
Technology spending has climbed sharply since the pandemic. Share buybacks have jumped again. But there is a big risk that the high profit margin expectations for 2022 will be steadily revised lower next year as margins are squeezed from rising labour and non-labour costs.
