Shortages and Inflation

The Covid lockdowns shut down businesses as people remained quarantined at home. Consequently, businesses drew down inventories as they worried about a depression-like economic environment.

What few foresaw was that many consumers would exit this pandemic richer than when they entered it. Portfolios and home prices have performed very well, while savings rates have skyrocketed. There is a lot of pent-up demand, and as lockdowns across America subside sales comps at US retailers are rising.

Rising demand coupled with depleted inventories is causing a shock-like rush to restock. Amit Mehrotra, head transportation analyst at Deutsche Bank explains:

“We look at sell-through rates of major retailers and compare them to how inventory per store is tracking. If you look at Dollar Tree for the most recent quarter, same-store comp growth was 4.9% but inventory per store was down 5.1%. That’s a 1,000-basis-point spread between sales and inventory. The spread for Walmart was over 700. At Target, it was almost 400. At Tractor Supply, it was a whopping 2,000 basis points. These are big numbers. It’s a critical sign.”

He adds:

“Inventories are flying off the shelves faster than companies can replenish them. That is why the inventory restocking cycle is still in the early innings.”

This resurgence of inventory restocking costs money and is pushing up all kinds of prices involved with manufacturing and shipping goods.

Baltic Dry Index up 428% over 1 year:

Copper up over 90% during past year:

Lumber up over 350% during past year:

What do this restocking scramble mean for you? Higher prices.

Inflation expectations have risen significantly over the past year, as indicated by 5 year breakeven rate. (The breakeven inflation rate represents a measure of expected inflation derived from 5-Year Treasury Constant Maturity Securities and 5-Year Treasury Inflation-Indexed Constant Maturity Securities. The latest value implies what market participants expect inflation to be in the next 5 years, on average.)

OK but what does this really mean for you? By some estimates the cost to build a house has risen by over $30,000. This increase is reflected in both new builds and resales. Expect to see price increases in day-to-day goods too. Proctor & Gamble has stated they will raise prices in September to fight higher commodity costs. Kimberly-Clark and Coca-Cola have also recently announced price increases. This is just the tip of the iceberg.

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