PROPERTY INSURERS price policies today but face payouts a year from now. That makes their profits hostage to inflation. As swathes of America’s economy have begun rapidly reopening for business in recent weeks, thanks to falling rates of covid-19 infections and rising ones of vaccination, William Berkley has been paying close attention to prices of building materials and anything found inside homes, from lamps to laptops. The replacement value of a home in America may have leapt by 20%, year on year, Mr Berkley thinks. Since the eponymous founder of WR Berkley launched his firm over half a century ago, he has never witnessed a time like the past year—not even in the inflationary 1970s.
Economists debate whether the rapid climb in inflation, which rose at an annual rate of 4.2% in April, the fastest since September 2008, will prove as enduring as 50 years ago. The Federal Reserve insists that higher inflation will be “transitory”. Partly for that reason, chief executives of many big companies are wary of discussing inflation in public. When Darius Adamczyk, who heads Honeywell, a huge industrial conglomerate, mentioned during an earnings call in May that inflation “is here and it is probably a lot more pronounced that people think”, his comment went viral among financial types on the internet.
But with many supply chains clogged and American consumers flush with unspent pandemic-year savings, augmented by stimulus cheques from the government, many bosses are, like Mr Adamczyk and Mr Berkley, bracing for a period of higher costs. They are adapting their corporate tactics accordingly.
In the 1970s companies responded to rising input prices in a number of ways. First, they passed as much of the higher costs as possible on to customers. When that strategy was exhausted, they turned to automating operations or moving them to places with cheaper labour, either elsewhere in America or abroad.
Companies are now dusting off that old formula, starting with price rises. In April Coca-Cola told analysts that its soft drinks are about to become more expensive. Likewise for Chipotle’s burritos and Whirlpool’s washing machines. Procter & Gamble plans to raise the prices of some of its consumer products by “mid to high single digits” in September. Some companies, such as Royal Canin, which makes pet food, have kept prices steady but cut the size of their portions.
Michael Goldman, who runs a furniture-maker called Carolina Castings in North Carolina, has seen the cost of resin shoot up by 75%, of lumber three- to four-fold, and of a container to ship materials from Asia by $16,000, to $20,000. He has increased his rates for customers twice so far this year. WR Berkley began repricing its premiums upwards last year but has accelerated the process in the past couple of months. Insurance brokers who sell the company’s policies have not grumbled; they expected as much, says Mr Berkley.
Pent-up consumer demand allows companies to get away with even large price rises. Returns, which held up in the first quarter, are expected to do so again in the second. Margins actually rose in that period at large American firms, according to Credit Suisse, a bank. This suggests that as yet, far from forcing companies to absorb the extra costs, inflation may have given them some extra pricing power.
Some firms are, however, preparing for a time when they can ratchet prices up no longer. Mr Adamczyk said in January that he had established an internal Honeywell task-force to respond to inflation (though he was vague about what exactly it might do). Lineage, a logistics firm with 200 cold-storage warehouses across America, says it has created several such teams. One focuses on recruiting workers in a tight market, another on avoiding supply bottlenecks in critical construction projects. Sridhar Tayur of the Tepper School of Business at Carnegie Mellon University, who consults with three large companies, says that each is redesigning products to eliminate waste and streamline manufacturing.
CEOs’ biggest headache by far is rising labour costs. Companies are trying to keep a lid on future wage rises by using one-off inducements such as signing bonuses. Bank of America reckons that American manufacturers are paying existing employees about 4% more than a year ago. But, the lender estimates, workers can expect a pay rise of 13% if they switch jobs. Even so, many firms are having trouble filling vacancies. “It is hard to tell how much it costs to hire someone because you can’t find anyone,” sighs Mr Goldman. His “help wanted” ads often go unanswered; many of those who respond fail to turn up for interviews. Given Americans’ apparent reluctance to get back to work, be it because of continued fears of infection with covid-19, generous unemployment insurance, or both, wages may need to rise further.
If inflation does prove stickier, some firms will contemplate shifting production to places with more plentiful and cheaper labour. All three companies advised by Mr Tayur are pondering whether and where to move, within America and abroad. Others may want to get rid of human workers altogether. America Inc has ramped up business investment by 15% this year. Part of this is going towards automation, and not just in manufacturing. Eric Gordon of the University of Michigan points to restaurant chains, some of which are installing automatic grills and letting diners place orders on an app, enabling staff to focus on serving customers rather than waiting for them to make up their mind at the counter. As hotels reopen, robot floor-cleaners are becoming more common.
Many such productivity-boosting investments make good business sense even in a low-inflation world. That is the outcome many chief executives will still be hoping for. It is certainly what policymakers are banking on. In the 1980s the Securities and Exchange Commission required companies to publish balance-sheets and income statements both in nominal terms and adjusted for inflation. This requirement has been watered down over the years. In November the markets regulator appears to have all but binned the last explicit vestige of it. It would be ironic if this now proved premature.