That said, there’s plenty of evidence companies remain able to pass along costs while the labor market remains strong. Shares of Caterpillar Inc., for instance, last month surged after the company reported higher shipments of machines and increased prices across its end markets in the third quarter.
“Inflation is great for corporations’ sales growth,” said Zhiwei Ren, portfolio manager at Penn Mutual Asset Management.
Biden said he’d seek to impose higher taxes on oil companies that record “windfall” profits, a promise that will be all but impossible to deliver. Federal Reserve Vice Chair Lael Brainard made the case recently that inflation could slow if business markups retreated, saying that “there is ample room for margin recompression to help reduce goods inflation as demand cools, supply constraints ease, and inventories increase.”
Lisa Erickson, senior vice president and head of public markets group at U.S. Bank Wealth Management, says that companies are in a “tough spot right now” as labor costs remain high.
“What we’re going to continue to see is as long as price pressures remain, we are going to see companies likely needing to pass through some of those increases to consumers,” she said in an interview.
Seemingly unending price increases can heighten voter anger, putting pressure on politicians to act. President Richard Nixon in 1971 instituted a short-term freeze on prices and wages. It was, as Art Hogan, chief market strategist at B. Riley Wealth, put it, a disaster. Inflation kept climbing until the Federal Reserve finally jacked up interest rates to cool the economy.
“There’s an old saying that nothing cures high prices like high prices, and that just means that high prices tend to bring on incremental supply. That’s a self-leveling process,” said Hogan. “Injecting some policy in the middle thinking that’s going to help out just works in the opposite direction. We learned that back in the 70s.”
Companies are also, in such circumstance, hindered from making capital-investment decisions, said David Kotok, chief investment officer at Cumberland Advisors.
“What you do as a business enterprise is you postpone the long-term decision because you don’t know how to deal with it or how to price it. It’s a shame that we’re doing that,” he said. “Price controls, they didn’t work and history shows that they never really do.”
—With assistance from Joe Sobczyk, Isabelle Lee, Lu Wang, Katie Greifeld and Molly Smith.
This article was provided by Bloomberg News.