Get ready to open your wallets a bit more.
Whether you are in the chemical business, the services industry or the business of feeding people, the cost of business continues to rise. As those costs rise, so too are the number of questions surrounding the emergence of inflation into economies hoping to emerge from the COVID-19 pandemic in the coming months.
Chemicals, energy and fertilizers are what we talk about here at ICIS, and prices for most of those materials are higher to substantially higher on a year-on-year basis. But step outside to other major commodities that go into making the products and infrastructure necessary for 21st Century living and you will see that our markets are not acting in a vacuum.
Example: Can you name the commodity being tracked in this graph?
That’s lumber, and on Thursday its price was near $1,100 per 1,000 board feet according to the chart from Trading Economics. The reasons for the historically high prices mimic those seen in the industries ICIS covers: Lumber production fell at the onset of coronavirus-related economic shutdowns in the US and Canada in Q2 2020, then as it returned it could not keep up with a surge in demand for new construction of homes and do-it-yourself improvement projects at existing homes where increases in remote working led homeowners to invest more in their living and working spaces. One estimate from a US regional home builders association says that the cost of lumber for a new 
build has increased up to $25,000 per home. That is being passed on to buyers, helping to contribute to the rise in US home prices in 2020. But those high prices seem to be contributing to a nascent downturn in new residential sales, as sales of new homes in February were 18.2% lower in the US than the month prior.
The tumble in new home sales may be harbinger of sustained demand destruction, especially when you consider these two points:
- Some US real estate experts say that for every $1,000 of house price increase, more than 150,000 potential buyers are priced out the market.
- Steel and lumber analysts see no end in sight for the high prices for those key building materials.
The raw material price boom outside of chemicals, energy and fertilizers is not just a US or North America story –
it is global, and it permeates down to the everyday foods we eat. The United Nations’ Food and Agriculture Organization (FAO) Food Price Index started 2021 on the same upwards trajectory as it ended 2020 as illustrated in the charts below, with vegetable oils, cereal grains and dairy products leading the rise. March was the 10th-straight month of global food price increases, and the culprits have that familiar ring to them – strong demand, tight supply and logistics that are unbalanced and higher priced.
No surprise then that a host of food brands such as General Mills, JM Smucker and Hormel have announced they are raising prices. They join other consumer brands in other sectors such as Kimberly-Clark, The Container Store, Sleep Number and La-Z-Boy who have stated that costs for raw materials such as polypropylene (PP), polyurethanes and other chemicals and polymers are squeezing margins and causing the need for actions such as price hikes.
That all eventually has to lead to consumers’ wallets, or else someone in the supply chain will get margin-squeezed out of business. To this point, major global consumer price indexes have been rather muted in their rises, with OECD countries as a whole and the US in particular registering a 1.2% inflation rate each for Q4 2020 (see chart below). Expect that rate to increase when Q1 2021 statistics are released, and likely further in the coming quarters as today’s high commodity prices trickle through the supply chain to retailers and consumers.
To that development, the following should be stated: Rising prices are not an absolute negative for
consumers, provided wages rise in tandem or faster. Right now, US wage growth is clocking in around 3.4% according to the Federal Reserve graphic here, and as long as a growing rate of inflation does not overtake the wage growth rate, the American consumer should be able to stomach retail price increases. But it does not take much of a leap of faith amid continued high prices across a broad slate of commodities to imagine retail prices creeping past the wage growth rate as this year progresses. The same holds true for the European Union, where wage growth was estimated at 3.7% at the end of last year. The EU is at least better off than Japan, where wages actually fell by 0.2% year on year as of February.
Upwards pricing pressures may well stake their claim to all of 2021. Consumers will feel increasingly pinched if wage growth does not do the same, which in turn will lead to pain in the supply chains as consumers are forced to be choosier with their inflation-deflated dollars.
Disclaimer: The views in this blogpost should in no shape or form be taken as actual forecasts and are my personal views only.