Why I'm (Mostly) Not Worried About Rising Prices | 7investing
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Why I’m (Mostly) Not Worried About Rising Prices

May 13, 2021 Advisor: Daniel Kline
Industries: Commodities   Consumer Discretionary   Consumer Electronics   Consumer Staples   Entertainment  
Advisor Update Date: May 2021

Supply chains can’t turn on a dime. We saw this at the beginning of the pandemic when people started working from home and supplies of everything from toilet paper and paper towels to at-home gym equipment were strained.

It’s not that the country didn’t have enough toilet paper. The problem came from the fact that home toilet paper and office toilet paper are different. Since we no longer needed those giant roles of easier-to-break-down toilet paper used at work, we ended up with strained capacity and a need for manufacturers to rejigger their capacity.

We’re seeing something similar across a variety of product categories as the country reopens. That seems like inflation — and perhaps in some categories it is — but largely we’re seeing increased prices due to unexpected demand.

May, for example, is generally not a huge tourist month in Central or Southern Florida. That means that stores may not stock as many cheap beach towels (just to pick one random product) as they would during June or July. If we see a spike beyond the normal patterns in May then there will be a mix of shortages or higher prices.

That’s a very simple example, but it’s emblematic of what’s happening in all sorts of categories. Businesses plan for supply to meet demand. In times when demand veers off the norm, that creates short-term problems which eventually get sorted out (as in, we all have as much toilet paper as we need now).

Nobody knows exactly how the reopening will go

Some parts of the country have largely reopened while others have just begun the process. Here in Florida, we’re seeing a large increase in what I’d call local tourism; people from here visiting more touristy parts of the state. We’re also seeing strong trends when it comes to out-of-state bookings for fall, winter, and spring Disney/Orlando vacations.

As travel has increased we’re seeing prices rise. That’s due to higher demand and limited supply. Some restaurants, for example, can’t find enough workers to operate at full capacity. Some stores are also struggling to keep shelves stocked because normal demand patterns have been disrupted.

Under non-pandemic circumstances, inventory decisions are made based on previous experience. There might be some variance, but the swings won’t be as wild as the ones we’re experiencing right now.

Were we not just coming off a pandemic that caused financial strains across all sorts of businesses, companies might just increase their inventory and hope that demand rises to meet it. Right now, many companies are still being cautious when it comes to ordering because demand patterns remain uncertain. Will see a summer post-pandemic spike in consumption or will demand for certain things be higher for an extended period of time?

In addition, we’re also dealing with what I call the “Starbucks dilemma.” In the pe-pandemic world, the coffee chain was busy during the morning (when people went to work) and in some markets at lunchtime. Now, the Starbucks across the street from where I live may have no line at 8 a.m. but have the drive-through line backed out onto the street at 11 a.m.

Will these patterns continue as at least some people go back to a traditional morning routine? It’s hard to know (and probably hard for Starbucks and other chains in similar positions to handle schedules, inventories, and the prep work that gets done before people order).

Give it time

I hate the phrase “the new normal,” but it sort of applies here. Managing inventory requires past data along with future projections. Right now, the past data no longer applies and future projections require guesses. That’s going to lead to items being out of stock and/or companies charging more for their limited supply.

Retail pricing isn’t all supply and demand but that’s a pretty big piece of it. Over time, supply chains will adjust and demand will become more predictable. That doesn’t mean there won’t be some inflation, but the numbers will become more predictable and we probably won’t see long-term meaningful increases on everyday items.

Think of now as a more broad extension of when people were paying huge prices for hand sanitizer,. It took a few months for companies to meet the demand but now, your local grocery chain generally has a variety of hand sanitizers. The same will happen in other industries as prolonged shortages lead to production increases or short-term demand spikes lead to lower long-term demand (there was a six-month period where we did not need to buy kitty litter because my wife and I both ordered 12 bags online when we feared a shortage).

This may feel like inflation but it’s more of a supply chain hiccup. There will certainly be some long-term changes as the population has shifted a bit and some people may not revert to previous locations or past patterns. Right now, however, we’re experiencing a slow national exhale and that’s going to wreak all sorts of havoc that’s not really something we’ve ever experienced before.

Sorting out what reality looks like will take months (and maybe longer in some areas). But it seems likely, for example, that there’s pent-up demand for travel but probably not a long-term shift to Americans traveling more. The same might be true when it comes to buying new grills or increased demand for party supplies.

Yes, some price inflation may turn out to be long-term, but right now, I’d avoid panic or thinking that what’s happening now reflects anything other than short-term inability to know what’s going on making it very hard for companies to manage inventory.