Inflation may be transitory, but it's going to be a doozy and Fed Chief Jay Powell is going to have to steel his heart when this quarter's price elevation is exposed. With rates one again going up today we have to bet that it might be too difficult for him NOT to raise rates now that the Great Reopening is upon us.
Consider what industries are seeing incredible inflation. Right now, Nucor (NUE) , America's biggest steel company, just told us this week that it has increasing demand for every kind of steel there is, meaning steel for buildings, oil piping, vehicles and the like. That means it can put through price increases with ease. And that's before an infrastructure bill that will certainly include steel prices.
We know there is still unrelenting pressure on the most important commodity in housing: lumber. Until we get a new deal with Canada, the tariffs remain in place and there's not enough supply to suppress pricing. That's increasing the price of every home, but once again we have heard from every homebuilder and they have no problem passing on the price increases, especially with the low rates, the ones kept down by Jay Powell.
This semiconductor shortage is roiling through the hottest vehicle market in years. How bad is it? You have the production line for the number one, bestselling vehicle in America, the F-150, being halted by Ford (F) for the weekend. Not enough chips.
If you can't get a new truck you have to go used, which used to be a bargain. Not anymore. They are in such short supply that they've gotten out of control. Meanwhile it seems as if all the semiconductor companies are using the shortage as a reason to raise prices. You can see that in their stocks.
Sure there's hope that there will be a let-up in the shortage. However, there is still no sign of any near-term boost in production. Intel (INTC) talked this week about putting up new foundries. But that's a 2024 story at the earliest and the key machines that are needed, those made by Lam Research (LRCX) and KLA (KLAC) and Avino Silver & Gold Mines (ASM) are all back ordered. I don't think Intel can jump the queue. Again that's why so many of the stocks of these chip companies and semiconductor equipment manufacturers are hitting all-time highs. Think when Micron (MU) reports next week we are going to hear that the shortage has spread to many chip areas?
How about oil? It went down this week and that was encouraging by the closing of the Suez because of the errant beached whale of a boat is going to raise the price of petroleum products that are normally shipped through the canal. Meanwhile there's no let up to the increase in day rates for all sorts of ships and there's also tremendous pressure on the price of shipping in order to avoid the bottlenecks of west coast ports.
But the worst of inflation? It's coming Hurricane URI, and the debacle that is the destruction of the petrochemical industry in Louisiana and Texas, and with it all different grades of plastic making product this is made very scarce, again susceptible to radical price increases.
Here's an on the ground look of what's going on from a very solid source I have down there: "The plastic ripple finally hit the retail end of the business," this week, my source writes. "Our operations guys went to Home Depot (HD) last night to pick up some electric parts. The shelves were emptied yesterday because plumbers and electricians got word of the shortage and the 'toilet paper mentality' buying panic set in." The source went on to say that Home Deport jacked up the prices for plastic coated wire, plastic electrical boss and PVC pipe. Home Depot has to pass on the prices or its margins are hurt. Again, why that stock's going higher.
I think those prices are going to ripple through the entire country as there is no sign of a restart from many of the plants that were damaged by the storm.
Many of the prices I have mentioned can come down, but there's no easy or quick fix to any of them save the ship that's blocking the Suez. I think, collectively, they will ultimately force Powell's hand. As long as the economy's expanding it may not be bad for the economy or even the stock market because rates are still so low. But we can't ignore inflation anymore. It's alive and well and raging throughout the economy.