As pricing fears peak, corporate America lacks faith in the Fed to control inflation: Survey

CFOs grow more worried about rising costs and prices
The stock market has overcome inflationary fears on the way to setting new records this year, but in C-suites, the concerns about input costs, wage pressures and Fed policy remain elevated.

U.S.-based chief financial officers see inflation as the biggest external risk factor that their businesses face, according to the CNBC Global CFO Council survey for the second quarter, surpassing Covid-19, cybersecurity and consumer demand. The quarter over quarter jump in inflation concerns was large, with virtually no CFO having cited it in the Q1 2021 survey.

The survey was conducted from June 1-June 16 among 41 members of the CNBC Global CFO Council, which represents some of the largest public and private companies in the world, collectively managing more than $5 trillion in market value across a wide variety of sectors. The survey closed on the second day of the recent FOMC meeting at which the Fed spoke more explicitly about inflation and the forecast for a move up in rates was pulled forward.

“Consumers are spending faster than businesses and governments can ramp up. The result has been friction upon re-entry. That means heat,” said Diane Swonk, chief economist at Grant Thornton.

But in the past two weeks, the market has bounced back from a post-Fed meeting swoon to set new records because the Fed view has remained that inflation is transitory, and the most recent national price index data has provided support for the policy. While year-over-year price index comparisons are peaking, the month-over-month increases have moderated, such as in last week’s personal consumption expenditure index.

Inflation peaking?
The recent inflation numbers are more in line with what the Fed has been expecting, not a persistent price increase that goes on and on, said Erik Lundh, principal economist at the Conference Board. On a monthly basis, the price increases are still elevated prior to the pandemic, but they have come down from April.

“It does raise the question, have we seen peak inflationary pressure?” Lundh said. “We are not seeing escalation upon escalation.”

Consumer fears about inflation peaked in May. “What was a bit comforting was how fast it abated in sentiment surveys in early June. Many prices have begun to crest,” Swonk said, though some materials, such as lumber, remain well above pre-pandemic levels even after a recent decline.

Swonk expects the tensions to remain. “The good news is that most of the inflation we are seeing does appear to be transitory. The bad news is that it is more severe and longer lasting than many, including the Federal Reserve, expected. There isn’t really any muscle memory for what we are seeing. It is the first time that workers have had leverage since the latter part of the 1990s. Add the surge in retirement and loss in immigration, which was sliding rapidly pre-pandemic, and shortages are going to be more common.”

Wage pressures in labor market
Over the next 6 months, the largest group of U.S. CFOs (57%) expect cost of labor to increase the most, with cost of raw materials cited by 38% of CFOs. Cost of labor forecasts in the U.S. far exceed the cost expectations in other regions. In the EMA region, 72% of CFOs expect raw materials to increase the most. In Asia Pac, the forecasts are closer (44% citing raw materials as biggest source of cost increase; 33% citing labor), but materials is still seen as the larger source of price concern.

“I cannot recall one other time where inflation has been such a high risk factor among our members as it is now,” said Jack McCullough, president, CFO Leadership Council.

Among the CFOs with whom he is in contact, wage pressures are the biggest source of concern, and CFOs expect that to remain through the end of the year.

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