By Joseph V. Amato, president and chief investment officer—equities
The Fed could end up playing checkers while the economy is playing chess—with potentially worldwide consequences.
When year-over-year inflation hits 7.5%, it’s understandable that attention focuses on the sheer speed of price rises. But it’s the nature of the underlying drivers of that inflation that could make it more persistent, and more challenging—especially for central banks.
Tighter monetary policy cannot get truck drivers and factory workers back on the job, build warehouse space, or make container ships sail faster and ports run more efficiently to clear backlogs. But data from our Equity Research team suggests this is how current conditions stand out from previous inflationary episodes.
It’s now often said that the current inflation is supply-led rather than demand-led. We think that’s true in important ways, but it also helps to think about it as a perfect storm of demand and supply issues combined.
For example, a lot of the shock to the system appears to be due to the major shift to ecommerce during the pandemic, which is proving sticky. There is simply not enough infrastructure to handle this shift: According to the US Census Bureau, in 2020, US ecommerce sales grew by more than 32%, but warehouse capacity grew by just 2%.
Trucking capacity is also struggling to meet this new demand. SONAR’s Outbound Tender Reject Index, which measures the proportion of loads rejected by carriers, ran up to 25% in 2020. Short-term spikes to these levels are not that unusual, but it is unusual to see similarly elevated rejection rates over a year later.
We see similar bottlenecks further upstream, and similar signs that the impact could be persistent.
At around $15,000 per forty-foot equivalent unit (FEU), average ocean freight spot rates are literally 10 times pre-pandemic levels, according to SONAR. That is despite Alphaliner data suggesting that just 2% of the global container ship fleet is sitting idle. Moreover, forward freight rates suggest that it will still cost more than $8,000 per FEU as far ahead as 2024.
Even if you’re prepared to pay those rates, your goods could still get stuck outside a port: Normally, there’s a queue of 15 – 20 vessels outside US west coast ports; at the beginning of this year, according to Port of Los Angeles reports, there were more than 100. There has been some seasonal easing of the pressure since, but the queue is still unusually long and it’s not clear to us that this will be normalised any time soon.
Overly Rapid Tightening
All of this helps explain why US Producer Price Inflation (PPI) exceeded economists’ forecasts in January, and why the “trimmed mean” measure of Consumer Price Inflation (CPI), which cuts out the biggest price rises and declines, is at highs not seen since records began in 1983. This is not just about energy or used cars—used cars, by the way, went up 37.3% in 2021—it’s about supply and demand being out of whack across the entire economy.
So far, we’ve seen encouraging resilience on the part of businesses and consumers in the face of these pressures.