“Not Transitory” – US CEOs Warn Inflation Is “Unprecedented” And Becoming “Structural”

Some of the biggest names in business virtually attended the annual Morgan Stanley Laguna conference last week and warned about the complex nature of soaring inflation. 

Much of the discussion was centered around the soaring cost of raw materials, labor, and logistical nightmares. Corporate leaders from 3M Company to Trane Technologies to General Electric Co., among others, all warned about increasing inflationary pressures, according to Bloomberg. 

3M’s Chief CFO Monish Patolawala shocked attendees by calling inflation “unprecedented.” He said the impact of higher commodity prices and soaring freight prices would impact its 2021 earnings. 

Trane Technologies Plc’s CFO Chris Kuehn told a very similar story: “Unprecedented is the word we’d use around the inflation side.” 

At the virtual event, Morgan Stanley analyst Josh Pokrzywinski joked that everyone could check the word “unprecedented” on their 2021 bingo cards. 

But what has become an increasing concern, pointed out by General Electric’s CEO Larry Culp, is that inflationary pressures are “increasingly getting structural in nature.”

David Petratis, CEO of lock maker Allegion Plc, said inflationary pressures might stick around two to three years. He said his company is preparing for more persistent inflation, adding “it’s not a transitory situation.”

Diversified power management company Eaton Corporation’s CEO Craig Arnold said supply-chain bottlenecks are fueling price increase this quarter. “Much to our surprise, and to the surprise, really I think of everybody in the industry, we’ve seen that things actually got materially worse,” he said. “I’m hopeful that by the time we get to the end of this year, things have settled a bit,” he added. “But I’ll acknowledge as well — we got it wrong. I think we all got it wrong,” he said. Eaton expects revenue guidance for the current quarter to miss because of part shortages. 

Another company is Carrier Global Corp, which warned persistent inflation is ahead. So far, the home appliances corporation can’t raise prices faster than inflation. 

Raytheon Technologies Corp said higher commodity and labor costs are beginning to impact the company financially. CEO Greg Hayes said, “I wish I could tell you exactly how long this transitory inflation was going to last.” 

Hayes said August’s 5.3% year-over-year gain in the headline consumer price index is a huge number and should be closely monitored. 

After listening to some of the biggest names in corporate America, it’s becoming more apparent that current inflationary pressure exists well beyond commodities and is also found in complex supply chains. There has yet to be relief in shipping container or dry bulk costs in a highly interconnected world, and congestion at ports continues to build. This is all affecting companies’ ability to procure supplies. 

One thing that corporate leaders didn’t touch on is the increasing threat of stagflation. BofA’s Michael Hartnett recently told clients his macro backdrop for the second half is one of higher inflation, hawkish central banks, weaker growth, i.e., stagflation.