Inflation Takes Center Stage

March 21, 2022

One year ago, inflation was not even on the radar of most economists. Back then, the headlines were about vaccinations, more fiscal stimulus checks, and when and how the economy would recover. Little mention, if any, was made of labor shortages and wage hikes. There was little awareness that the hyperstimulated consumer spending side of the economy would couple with pandemic that would soon strain the supply chain and result in higher prices for almost all goods. The consensus annual average forecast of inflation for 2022 was 2% last January.

Six months ago, as supply chain bottlenecks became apparent, there was some concern about rising inflation, but analysts were focused on short-term commodity prices, opining that inflation would be transitory and abate as commodity prices retreated. For example, the price of softwood lumber had gone through the roof, but it soon returned to trend levels. The forces driving labor shortages and higher wage offerings to attract needed labor were just developing. The consensus average annual forecast for the consumer price index (CPI) for 2022 had risen to 2.4%, but the emphasis was on its temporary nature, which would be resolved as soon as the supply chain difficulties were corrected.

As this year begins, it seems likely that the supply chain bottlenecks will persist longer than earlier thought and that wages will continue to rise as manufacturers and service businesses still find it difficult to attract enough employees. The omicron variant of COVID-19 has brought fresh headwinds to the economy, driven by both demand and supply challenges. The CPI for December 2021 grew by 7% from the previous December, the highest year-over-year growth in 39 years. There is now a high probability of three or four interest rate hikes by the Federal Reserve in 2022 to tame the inflationary growth, which is now seen as persisting at least through this year, perhaps beyond, depending on whether higher prices lead to additional wage hikes to keep up with inflationary costs. Early in 2022, the consensus forecast is that the CPI will be up 4.8%, far above the Federal Reserve’s growth target of 2%.

Significant concerns remain about COVID’s impact on personal health, education, and child care matters, coupled with an unpredicted record number of employees quitting the workforce and retiring early or searching for better pay and working conditions. The first chart above traces the annual employee quits as a percentage of the total workforce at year-end. From a low of 12% during the depth of the 2008–2009 recession, it rose slowly over the next 12 years to 18% as the pandemic began affecting workforce behavior in 2020. The quit rate for 2021 has jumped to a record high of 26%, as trended in the first chart above.

Currently, inflation is growing faster for producers than for consumers. The producer price index for December was 9.7% higher than in the prior December, compared to the CPI’s 7% growth over the same period. The second chart above shows this trend and illustrates how higher producer prices end up costing consumers more over time.

The third chart above shows average hourly earnings by industry for December 2021. Total private employee wages are now growing at 4.7%, nearly double the 2.4% growth rate over the last economic cycle. The manufacturing sector now reports the largest number of unfilled job openings on record.

While the growth rate varies by industry, independent box converters can anticipate that their customers will be facing pressures much like those currently being felt in the corrugated industry. Historically low wages in the leisure and hospitality sector are the prime driver for the most rapid rise in their earnings. Wages in the manufacturing sector, which has the largest share of corrugated consumers, have been growing at a 4.4% rate, almost twice the average growth rate as during the last business cycle.

The fourth chart above expands on the overall 9.7% rise in the PPI in December 2021 to show the range of growth of some key commodities and products. Recycled paper has increased the most but is a good example of a commodity whose price can change rapidly, depending on market pressures.

The final chart depicts the high growth rates of selected consumer products. Gasoline’s hefty increase from December 2020 reflects the comparison to the many fewer miles traveled in the prior year.

To sum it up, inflation will be a top-of-mind issue for consumers and corrugated converter customers for the next year and more, as interest rates are set to rise and while supply chain bottlenecks become unclogged. What remains most unclear presently is how much initiatives to tamp down inflation will also weaken overall economic growth.