Analysis: CEOs and central bankers cross on inflation



  • Multinational CEOs Worried About Soaring Prices
  • Central bankers look long-term and see moderate inflation
  • Businesses try to pass cost increases on to their customers
  • Proof of big pay increases will be key
  • Aging demographics curb price pressures

FRANKFURT / LONDON, Aug. 5 (Reuters) – The bosses of the biggest multinationals are worried about rising inflation, but the very people who are charged with controlling price growth – the central bankers – seem unfazed.

Even though policymakers at the U.S. Federal Reserve, the European Central Bank and elsewhere differ on how quickly to end massive stimulus packages in the event of a pandemic, they agree on one thing: the recent outbreak of the disease. inflation is not a major concern.

Still, the latest round of corporate earnings calls are replete with mentions of the word “inflation,” with a tally up 1,000% year-on-year for companies listed on the S&P 500 in the United States and 400% in Europe for Stoxx 600 companies, according to Bank of America. research.

The point is, when CEOs and central bankers talk about inflation, they’re mostly talking about different things. The following article explains how they differ – and under what circumstances their interpretations might begin to converge.


‘Inflation’ is the buzzword of the second quarter earnings season as businesses of all shapes and sizes grapple with pricing pressures resulting from pandemic-related blows to struggling supply chains to cope with increases in demand after the lockdown.

Industrial conglomerate General Electric (GE.N), bicycle maker Harley-Davidson (HOG.N), consumer conglomerate Unilever Plc (ULVR.L), automaker Renault (RENA.PA) and pharmaceutical group Bayer (BAYGn.DE) have all gone out of their way to tell investors what they are up to with the substantial increases in their input costs.


Among the major central banks, the burning problem of inflation has been most pronounced for the Federal Reserve. Its preferred measure of price pressures is well above its target of 3.5%, the highest in three decades. Headline consumer inflation reached 4.5% in June.

But as some policymakers begin to recognize that the price pressures are greater than they initially thought, the Fed as a whole is sticking to the line that this is transient.

President Jerome Powell said last month that the factors driving up prices are unlikely now – a 45% increase for used cars over last year or a 25% increase for cars. plane tickets – repeat in perpetuity. “We are as eager as everyone to see this inflation pass,” said Powell.

Same message to the European Central Bank. “Inflation has accelerated, although this increase is expected to be mostly temporary. The medium-term inflation outlook remains moderate,” ECB President Christine Lagarde said on July 22.

And inflationary pressures are still nowhere to be found when it comes to the Bank of Japan. It highlights factors such as weak household spending to predict that inflation will be below its target of at least 2% until the year ending March 2024.


For starters, CEOs focus on their own industry while central bankers worry about the economy as a whole. The difference is significant: technology companies, for example, account for nearly 30% of the capitalization of the MSCI USA stock index but only represent 10% of US GDP, estimates the Bureau of Economic Analysis.

And, contrary to popular belief, the stock markets are a poor indicator of their national economy, especially in Europe. Companies listed in Europe make more than half of their sales outside their home region, compared to 30% for US stocks.

In addition, central bankers are inclined to take the complaints of large publicly traded companies about price pressures with a pinch of salt; they know that unlike the small businesses that are the backbone of the economy, the larger ones have the power to influence and hedge price changes in their supply chain.

More fundamentally, central bankers in the United States and the eurozone fear repeating the mistakes of the past decade, where they tightened policy at the first signs of mounting price pressures that ultimately never fully materialized.

And they even have spoke of the merits of “making the economy work hot” – that is, letting inflation exceed its target for a while to give the labor market time to get back into shape.


Producer prices have increased by 5-10% in developed economies. But the extent to which businesses are willing and able to pass the higher costs on to consumers is less clear.

This is certainly happening in the United States: companies from Procter & Gamble Co to Starbucks Corp have done it or are considering doing it. Read more

Yet while two-thirds of Japanese companies do the same, according to a Reuters poll, a slim majority still did not expect this to raise the final price of their products in the second half of the year.

Similar picture in the euro area: most industrial companies contacted by the ECB expected a pass-through of higher input costs, but service sector firms saw stable prices ahead.


For central bankers, the litmus test of whether price hikes will be sustainable is whether they start pushing up wages. Here, the picture differs according to the main regions.

Wages in the eurozone rose a modest 1.5% in the first quarter. Cash income in Japan is stuck below pre-pandemic level and recent increases in Britain and Australia are expected to run out of steam. Read more

Even in the United States, where wages and salaries rose throughout the pandemic and rose 3.2% year-on-year in the second quarter, the Fed remains optimistic.

“I think we are a long way from making any further substantial progress … towards the maximum employment target,” Fed Chairman Jerome Powell said on July 28.


Oil prices, which briefly turned negative last year, rebounded to push headline inflation up around the world, making the year-over-year percentage change look huge, though they were not. income only to more normal levels.

Central bankers like to filter out such volatility, as it comes and goes, and focuses on what’s called core inflation which suppresses energy and food prices. On this measure, prices rose only 0.9% in the euro area last month and fell 0.2% in Japan in June.

U.S. consumer staples, the Federal Reserve’s preferred measure of inflation, rose more than 3% year-over-year, but even that was blamed on supply disruptions, containers are still stuck in long queues in Asian ports.

Arguably, even American consumers, whose views on inflation are generally guided by things like gasoline price fluctuations, adhere to this logic.

A regular University of Michigan survey shows that although they expect price increases of around 4.7% over the next year, that drops to just 2.8% over a horizon of five years – well within the range of the past two decades.


If the current price spike lasts long enough to affect wages and people’s expectations for future inflation, then business leaders will have won the day and central bankers will adjust their positions – and ultimately their policies.

For now, they’re betting it won’t, especially in economies where populations are aging, like Japan, and unemployment is high, like parts of the eurozone. More than 70% of economists polled by Reuters agree. Read more

“We must not let temporary inflation become structural inflation,” said de Guindos of the ECB. “So far there is no indication that this is the case, but we must remain vigilant.”

Additional reporting by Dan Burns and Leika Kihara; edited by Mark Heinrich

Our standards: Thomson Reuters Trust Principles.


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