While the White House and the Federal Reserve describe U.S. inflation risks as “transitory,” data from the CFO Survey by Duke University and the Federal Reserve Bank of Richmond paints a different picture. Finance chiefs expect the large increases to their input costs that they are suffering to last 8 to 12 months or longer. And some of those increases will be passed on to customers.
Abnormally high input cost increases have hit a majority of U.S. companies this year. About 62% of large U.S. firms surveyed by Duke and the Richmond Fed said they had more significant than normal increases in “some” of their costs, and 24% said the unusual increases occurred in a majority of their costs.
As a result, inflation and cost pressures were the second-most-pressing concern for finance chiefs at the end of the second quarter, up from fourth place in April, the survey found.
Packaged goods company Conagra Brands saw its cost of goods sold (COGS) inflation hit 8.6% in its fiscal fourth quarter, accelerating as the quarter progressed, CFO David Marberger said on the company’s July 13 fourth-quarter earnings call. Continuing increases in the costs of edible fats and oils, proteins, packaging, and transportation contributed to the bulk of the inflation, Marberger said.
“While we are able to hedge some of our inputs, others, particularly certain proteins, are not easily hedged,” he said.
Erik David Gershwind, CEO of industrial equipment distributor MSC Industrial Direct, said product scarcity, freight delays, and an extreme labor shortage are leading to more inflation “than I’ve seen in at least a decade.”
Price increases are coming from suppliers fast and furious, said Gershwind on the company’s July 7 fiscal third-quarter earnings call. However, noted CFO Kristen Actis-Grande, besides COGS inflation, the company has also started to “see some costs start to creep into the business on the SG&A side” in areas such as wage increases.
In the CFO survey, most firms anticipate the unique cost environment will persist for at least eight months, with roughly one in four respondents expecting elevated cost growth to last through most of 2022.
Conagra CFO Marberger said the company expects its fiscal 2022 inflation to come in around 9%, up from the 6% forecast in April.
To protect their margins, many companies are passing on the input cost increases to their customers. Nearly 25% of CFOs surveyed said they passed on almost all of their cost increases to customers, but another 25% said they were not passing on any of their higher costs. Of the companies experiencing abnormal costs increases, 57% of the large firms said they passed on 50% or more of their higher costs.
MSC Industrial Direct hiked prices in March, followed quickly by a summer price increase in early June.
Indeed, “significant and growing inflation that is producing the most robust pricing environment we’ve seen in years,” said CEO Gershwind.
Conagra CEO Sean Connolly said the company is “aggressively pulling on all of our levers to navigate the current inflationary environment.”
“The very early read on the data from those actions is that our elasticities look good so far, and we have more pricing coming,” Connolly told Wall Street analysts.
But the negative impact of the cost inflation will hit Conagra’s financials “before the beneficial impact of our responsive actions, including our pricing,” he said. The timing mismatch will result in pressure on the company’s margins in its fiscal first half.
According to the commentary accompanying the CFO Survey, business-to-business firms appear more aggressive in passing on input cost increases.
“In contrast, firms’ hesitancy to fully pass on costs directly to households and consumers may dampen their overall impact on the aggregate retail prices that define the inflation of direct interest to the Fed,” the researchers wrote.
Last week, the Labor Department said consumer prices increased 5.4% in June from a year earlier, the most significant jump since 2008.
Economists surveyed this month by The Wall Street Journal predicted that the Commerce Department’s core price index could be up 3.2% in the fourth quarter.
The second-quarter CFO Survey had 319 respondents. Responses were collected from June 21 to July 2.