The Federal Reserve may be downplaying the risk of lingering inflation, but those with arguably the best vantage point — the companies themselves — are taking a less optimistic view of rising prices.
Just last week, Conagra Brands Inc. and PepsiCo Inc. signaled that higher input costs will be more than a blip. Instead, they expect everything from raw ingredients to labor to remain substantially more expensive in the coming months.
“I’m not going to assume it’s going to be transitory,” PepsiCo Chief Financial Officer Hugh Johnston in an interview on Bloomberg TV on July 13. “It’s going to be with us through the better part of next year.”
If these forecasts are accurate, equity investors will eventually have to reckon with a sustained inflationary environment. They’ve been complacent so far, which has contributed to a rally in technology stocks and other groups with higher valuations that do well when Treasury yields fall. But that can change quickly if inflation remains elevated and yields climb, according to Michael Darda, chief economist and market strategist at MKM in Stamford, Connecticut.
“We see risk building in these sectors which would be vulnerable to a reversal in real rates or a rise in inflation expectations,” he wrote in a research note on July 14.
Reassurances from Fed Chair Jerome Powell that rising costs remain manageable helped soothe markets last week, particularly after a July 13 report showed the consumer price index rose the most since 2008 last month.
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