- During recent earnings calls, CFOs and their C-suite colleagues at Standard & Poor’s 500 companies discussed inflation more than at any time in at least a decade as they face surging consumer and producer prices, according to FactSet.
- Consumer staples, materials and industrial companies cited inflation more than other sectors during earnings calls from June 15 through Sept. 14, FactSet said, noting that consumer prices and producer prices rose last month by 5.3% and 8.3%, respectively.
- Meanwhile, FitchRatings increased its estimate for inflation this year to 4.4% from 4.1%, warning supply bottlenecks have pushed up the cost of processed goods for U.S. companies at the highest rate in 40 years.
An unexpectedly rapid rebound in demand this year has temporarily exceeded “the COVID-constrained supply side” and fueled inflation, especially in durable goods, Federal Reserve Chair Jerome Powell said at an annual central bank conference on Aug. 27.
The Fed’s preferred inflation measure — the core personal consumption expenditures price index — rose 3.6% in July compared with a year earlier, well above the central bank’s 2% target.
Fed policy-makers on Tuesday begin a two-day meeting after signaling in recent months that they may soon start reducing record accommodation by tapering $120 billion in monthly purchases of Treasury and mortgage bonds.
Most participants at the Fed’s prior meeting in July believed “that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year,” Powell said.
Still, before raising the benchmark interest rate from a record, near-zero low, the Fed has “much ground to cover” toward its goal of full employment, he said.
In the meantime, even as the job market improves, inflation will likely ease as demand and supply balance out, Powell said. By tightening policy too early, the Fed would throttle hiring and slow economic growth.
CFOs in some industries, including those involving durable goods, don’t share Powell’s confidence that price gains will gradually slow.
For example, manufacturers of building products face unusual disruption from inflation and supply constraints, FitchRatings said.
“Supply chain challenges in the U.S. building products and materials sector are taking longer than expected to normalize, limiting companies’ ability to fully benefit from strong end-market demand and grow sales,” FitchRatings said. “The disruption is causing production delays, which have been exacerbated by ongoing port congestion, pressuring sales volume and leading to higher raw materials and transportation costs.”
Supply chain upheaval has slowed the recovery as well as stoked inflation, FitchRatings said, prompting it to cut its forecast for U.S. gross domestic product growth this year to 4.1% from 4.4%.
Despite the headwinds, analysts and S&P 500 companies have raised their estimates for growth in earnings and profit margins for the third quarter compared with their June 30 forecasts, FactSet said.
“Analysts and companies have been much more optimistic than normal in their estimate revisions and earnings outlooks for the third quarter to date,” FactSet said. Analysts forecast earnings will grow more than 20% during the fourth quarter compared with the same period in 2020.
Base effects are a reason for the optimism, FactSet said. "These above-average growth rates are due to a combination of higher earnings for 2021 and an easier comparison to weaker earnings in 2020 due to the negative impact of COVID-19 on numerous industries," the company said.