8 min read
The cost of inflation and price increases: A market analysis
May 28, 2021
15+ min read
As the stock market continues to rollercoaster through the first half of 2021, there seems to be a looming issue on the minds of many analysts, brokers, researchers, reporters, the media, and companies.
General Inflation, as well as wage increases, price increases of supplies and materials, and rising labor costs seem to be behind numerous fluctuations in the stock market, but it has been difficult to make sense of how companies and sectors are specifically being impacted. Adding to the uncertainty is companies’ forecast in the face of inflation. Are general fears substantiated or unwarranted? We dove into the AlphaSense platform to get some answers.
We found over 210,000 documents from the start of the year mentioning inflation – that number balloons to 250,000 when also looking at “labor costs”, “wage increase” or “price increases.” Drilling even deeper, we see that nearly half of those documents have been published since April, a 35% increase over the last 24 days.
Across company docs, the focus is even more pronounced, with 66.37% more documents published in the last 24 days on the same topics.
Across these topics, there were a few key questions we wanted to see answered from company outlooks and transcripts.
- How will inflation (and what kind of inflation) affect the company?
- Will price increases within a company’s supply chain significantly impact a company’s financials?
- How worried should we be around inflation?
We checked in on the banking, capital markets, Equity REITs, and insurance companies to see what they had to say.
SEB A. SE | Nordic Outlook Press Release
…in the US, the focus of attention in financial markets is now shifting from large stimulus measures to overheating risks. An inflation impulse is on its way, but we do not believe it will be long-lasting. This will enable the US Federal Reserve to hold off on raising its key interest rate until 2023, but the Fed will again take the lead in the normalisation process.
Low-inflation environment tested in the US amid “green” spending
Overheating risks from massive US fiscal stimulus packages will put the low-inflation environment to its biggest test in decades. One risk scenario is that the US labour supply will not respond to increased demand and that this will be combined with rising inflation expectations. Our main scenario is that the upturn in inflation will be moderate. High household savings in the 37 advanced economies of the Organisation for Economic Cooperation and Development (OECD) will provide a buffer as stimulus measures are gradually withdrawn, while unevenly distributed income and wealth will remain a risk. Looking ahead, there are new arguments for expansionary measures linked to reforms that will improve the supply side of the economy and green sustainability
J.P. Morgan | Announcement of Final Results
…The very significant stimulus packages passed by central governments, most notably in the US, in addition to record levels of household savings should help to further boost economic recovery. Set against this optimistic scenario are the fears of the return of inflation, high or excessive debt levels and recurring trade tensions…
Outlook: weathering the economic uncertainty
We continue to believe that economic growth will be above trend for the rest of the year, initially powered by the US recovery but with growth picking up across other regions in the middle of the year. We expect inflation to be volatile but ultimately contained, while monetary policy remains accommodative. We therefore maintain our risk on view, however we seek to express it in a more nuanced way, reflecting the themes of higher yields, cyclical earnings recovery and above trend growth.
Home Bancshares Inc | Q1 2021 Earnings Call
John W. Allison
Co-Founder, Chairman, President, CEO & Executive Officer
Well, from an asset quality perspective, I always keep an eye on our hotels. But the information coming on our hotels is much improved from where it was. So I’ve kind of pushed that off the side. I do worry about inflation. I think inflation’s here, Will, and worry about the devaluation of the dollar, I’m scared to death that’s going to happen. I listen to a guy who I’ve done pretty good with on investing. And he says it’s coming, and he says it’s going to be quick and severe….he said, if you got cash, get rid of it. That just concerns me, the buying power of the dollar goes down and inflation goes up, and we have to fight that battle.
…I think the Fed has done a good job, and I think they’re trying to make piles to go ahead and do it….But I just don’t believe — I don’t believe they’re not looking where I’m looking. So the thing that bothers me the most is the inflationary side. But that could be good, too. A little inflation doesn’t hurt us all. And then a little kick up in rates wouldn’t hurt us. I mean you got — you think about it, you tie up your money — you tie up, we got $2 billion, we tie it up in 1.25 today or 1.30 or 1.40 today, and the 10-year goes to 3% by the end of the year, and you look so stupid. You think, why did I do that? What happened?
Manning & Napier Inc | Q1 Special Call
Yes. I think from an inflation standpoint, obviously, a little bit of inflation can be good for the economy. I think rising inflation is — it’s hard to argue that it’s really good for various asset classes. Whether we’re talking about equities or bonds or real estate, I think rising inflation does not help. I think equities are definitely an advantage in a hedge relative to fixed income in terms of inflation. So that’s the net benefit. I think in terms of like how the expectation of rising inflation impacts our day to day and our investment process, I think we’re trying to…look at each individual company and look at their ability to offset some inflationary costs, whether it’s inflationary pressure, whether it’s from a cost perspective or look at their power to increase their ability to increase pricing. We really try to get a handle on how much of a hurdle is inflation going to be on the fundamentals of the business and what does that mean from a valuation perspective.
So again, we’re trying to sort of look at it individually. I think more broadly, we have tried to take specific actions that actually hedge against inflation. I would know the recent investment in gold as a way to sort of offset some of the risk around rising inflation, but we also have a very decent chunk in energy, where commodities have been — have historically served as a hedge against inflation. So net-net, I think from an equities’ perspective, we’re definitely sort of managing that, but we’re also taking a more active stance.
FS KKR Capital Corp | Q1 2021 Earnings Call
Daniel Ryan Pietrzak
…Going forward, we believe the coming quarters will be marked by continued improvement in free cash flow growth across many sectors, offset only partially by the effects of expected higher near-term inflation. Over the immediate term, while we continue to believe that modest inflation is healthy for the overall economy, we believe inherent structural forces, including technology and demographic trends, will help balance longer-term inflationary pressures.
W.P Carey Inc | Q1 2021 Earnings Call
Jason E. Fox
CEO & Director
In addition to accretive acquisitions, a meaningful contributor to our future growth comes from the rent increases built into our leases, a significant portion of which is tied to inflation.
Given renewed expectations for higher inflation, I’ll take a moment to provide a little extra detail on our rent escalations. 99% of our ABR is generated by leases with some form of built-in rent increases. 61% of ABR comes from leases tied to inflation. So if we enter a period of sustained inflation, we remain very well positioned for it to flow through as incremental rent growth.
Of our leases with rent increases tied to inflation, the majority, representing 38% of total ABR, is based on uncapped CPI with the largest category being those tied to U.S. CPI. The other 23% of ABR that’s tied to inflation includes leases with floors and/or caps, which we refer to as CPI-based. Within this category, the average floor is around 1.5% on an annualized basis and the average cap is approximately 3%.
In an inflationary environment, if our 3% caps become relevant, it would likely mean that we would be achieving substantially higher same-store rent growth than we are today. For now, however, the floors continue to be more relevant than the caps as drivers of annual growth in our leases.
Finally, 35% of ABR is generated from leases with fixed rent increases where the average increase is approximately 2% on an annualized basis.
Rent increases generally occur annually, so over time, will flow through to rents. Given the profile of our rent escalations, we believe we are one of the best positioned net lease REITs for inflation.
Welltower Inc | Q1 2021 Earnings Call
Shankh S. Mitra
CEO, Chief Investment Officer & Director
Yes, Jonathan, there’s no question that you will have labor cost inflation. I do not believe that problem will be as acute as you have seen last 5 years when all the — frankly speaking, all of our portfolios, given where the locations are, regardless of local regulations have sort of moved at or above that $15 type of numbers. So you have seen a very significant increase of labor cost. Will you see labor cost inflation? Absolutely. But I think you will also see margin expansion from, as Tim talked about previously, we believe that you will see the margin expansion going back to the historic margins level. So it’s a yin and a yang.
I will tell you one thing, though. I would highly encourage you not to look at 1 quarter or 1 month of labor costs and projecting there. This is a lot of noise and volatility around the fact that a lot of people have received the stimulus check, and that has impacted short term. We do not believe that will be sustained as this sort of — this dries up. However, you are right that labor cost inflation will remain, but it will not be what you see in other sectors, because what you are seeing in other sectors such as lodging and all the sectors, they have laid off all their employees, the shutdown, right? That was the case. For us, our communities have never shut down. They continue to employ our — obviously, because to take care of our residents, and that continues. Is it — is there no issues? Absolutely not, will remain so. I would also encourage you to think about the potential immigration changes that is — we’re hearing about. Obviously, I know it less — probably less than you do, but that also has an offsetting impact. So it’s a long term problem, but just understanding the demand supply of labor as it relates to demand supply of people and also how that impacts people’s other choices at home, this will all come into place.
INDUS Realty Trust, Inc | Q1 2021 Earnings Call
Michael S. Gamzon
CEO, President & Director
…we see strong demand and rent growth in all of our markets. At the same time, strong growth in demand has created some pressures, notably in the availability and pricing for key construction inputs. The most significant of these is the availability of steel bar joists used to support our buildings’ roof structures. Recent pricing for steel bar joist is up materially, and lead times have increased from 12 to 14 weeks to now up to 25 weeks. Other construction inputs, such as PVC piping and certain petroleum-related products, and even the cost of overhead warehouse doors, amongst others, also have seen significant price increases.
While the strong growth in the industrial sector does have this added cost, we are fortunate that tenant demand is strong, and we expect rising rents will offset much of the impact of these input price increases.
We currently estimate that the input cost inflation I described before, with steel being the largest factor, is creating an approximate $6 to $8 per square foot increase in total project costs.
Using our current market rent assumptions, this increase in cost is not expected to have a material impact on the stabilized cash NOI yields for our development portfolio, which we continue to forecast to be between 6.1% and 6.6%. While we are hopeful that these cost increases and availability issues resolved more quickly than we have budgeted, the situation remains fluid, and we will continue to actively monitor the potential impacts on our projects’ timing and yields.
Thomas Sinnickson Gayner
Co-CEO & Director
It would be my expectation that the actual inflation that’s really taking place on the ground is more than what the headlines would report. So all of the managers who live and eat and sleep and breathe these businesses every day, they’re doing the best they can to control their costs, to get their supply chains humming and working and making sure that they’re charging appropriate prices to earn a good margin of whatever product or service they’re providing.
That’s true every day. That’s true in the public securities portfolio of the companies we look at. And we’re really looking for the same kind of behavior from the managers of our businesses at Markel Ventures as we expect from the managers of the publicly-traded companies that we’re investing in. And that really doesn’t change whether inflation is low or high, but I don’t want to be caught asleep at the wheel and not aware of the heightened sensitivity and focus that I think should be applied to that line of thought these days.
And to sum it up, and I think I mentioned it in the comments, we think the dumbest thing you could do right now is to lock in low, long-term rates of return. So we don’t plan to be geniuses or the smartest people in the room, but we try not to be the dumbest. So as long as we don’t do stupid things, the good things compound.
Intact Financial Corporation | Q1 2021 Earnings Call
Senior Vice President of Personal Lines
So on the pricing side, as Patrick mentioned, we’re working very closely with the claims team and making sure that in our overall profitability assessment of our book we reflect the projected trends we think we’ll have in terms of inflation in costs. And that’s exactly why in the past we’ve put some measure and action plan around our pricing to make sure we would cover those inflation.
So as we are sitting today, we have tempered our rate momentum because of the temporary reduction in driving. But as soon as we see that the level of driving is picking up, we’ll get back to our rating strategy and making sure that we’ll cover for the inflation in cost we project.
Charles J. G. Brindamour
CEO & Director
So the severity inflation which we’ve observed for a number of years, Brian, is fully baked in, in our rate position and our rate adequacy. We’re temporarily reflecting a drop in frequency, but we’ve done that in a way where we can revert back to pre-COVID rate levels without too many obstacles as driving returns back to normal. And I think our stance on severity has been quite cautious.
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