Wages are rising too, especially for workers in the retail, leisure and hospitality sectors that are returning to jobs as the economy reopens. That adds to inflationary pressures, because some companies will choose to hike prices in order to maintain profits.
Labor shortages aren’t helping.
“The bond market is still not concerned about inflation. It’s buying what the Fed is selling,” said Randy Warren, CEO of Warren Financial.
The problem is that there is a chance the Fed could wait too long to react to inflation.
“Is inflation transitory or something more structural?” asked Steven Oh, global head of credit and fixed income with PineBridge Investments. “Will the Fed lose control of it down the road and make a policy error and not have the ability to rein it in?”
Oh doesn’t think that will be the case. And many others agree. They argue that investors must keep in mind how rapidly the economy has roared back.
For that reason, it should not be that big of a surprise that there are dislocations in the job market and supply chain. It will take time for conditions to revert to what they were like in late 2019 and early 2020 before Covid-19.
“There are a lot of questions about inflation because you see it in everyday life,” said Bryan Koslow, principal of Clarus Group, a wealth management firm. “But we may have seen the peak, especially in terms of wage growth.”
Even if that does turn out to be true, the mere fact that investors and consumers are so focused on prices is noteworthy. Inflation has essentially been a non-issue for more than a decade.
“The Fed has to take the inflation concerns seriously,” said Troy Gayeski, co-chief investment officer and senior portfolio manager at SkyBridge Capital. He added that he thinks there is a 20% chance that inflation pressures turn out to be more persistent as opposed to transitory.
“The risk of meaningful inflation has been non-existent since 2008. Until now,” Gayeski said.
What’s getting more expensive
Lumber prices have soared. And the housing market continues to boom. That’s led to a big spike in the prices of couches and other household furnishings.
Used cars are a lot more expensive too. Chalk that up to people returning to work and a dearth of new cars on dealership lots due to the chip supply shortage that has hurt production of new vehicles.
People are traveling more as well. Airfares have shot up in anticipation of what some are dubbing the red hot vaccine summer.