The inflation bugaboo raises its ugly head

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Concerns about increasing inflation are starting to grow right along with burgeoning confidence in U.S. economic prospects, which offers up yet another indicator trucking will need to keep close watch upon in the months ahead.

Inflation can impact trucking in a number of ways, with the most obvious being hikes in fuel prices.

But another ripple effect from rising inflation stems from how the Federal Reserve usually combats it: higher interest rates.

Sandeep Kar, global director of commercial vehicle research at research and consulting firm Frost & Sullivan, told me in an interview earlier this year that higher interest rates are something that can significantly impact total cost of operations or TCO calculations in the trucking industry.

“We forget we’ve lived with low-interest rates for years now,” Kar emphasized to me.  “As the economy improves and interest rates go up, that’s going to directly affect the tractor-trailer [cost] portion of  TCO, though leasing can mitigate some of this.”

Financial services firm Northern Trust polls investment managers participating in its programs every quarter and its latest survey conducted June 4-13 this year discerned a mix of positive and negative vibes -- with one of those big negatives centered on the potential for higher inflation levels.

While the company found investment manager confidence in U.S. economic growth reached a five-year high, concerns about inflation and geopolitical risk are rising too, with seven out of 10 respondents saying the Russia-Ukraine conflict could have a negative impact on equity markets.

Northern Trust’s survey also found 51% of investment managers expect inflation will rise over the next six months up from 33% who held that view in the first quarter – the highest percentage since 2011, noted Christopher Vella (at right), chief investment officer for multi-manager solutions at Northern Trust.

“At the mid-point of 2014, investment managers appear to be very confident in the strength of the U.S. economy, despite the negative growth that started the year,” he noted. “But there are a couple of items that bear watching. Geopolitical risk is the top concern for managers, and expectations for U.S. inflation are the highest in three years.”

Globally, Vella said  investment managers are focused on geopolitical risk, ranking it as the top risk facing equity markets. Although markets have largely recovered since Russia’s takeover of Crimea, 61% of investment managers believe there is a fair chance that the conflict will lead to further declines in markets, and another 9% think it is very likely to have an adverse impact.

[You can watch Vella describe North Trust’s latest quarterly results more broadly in the video below.]

Still, following a slow first quarter [if a 2.9% decline in U.S. gross domestic product can be called that] 68% of managers Northern Trust polled – the largest percentage since 2009 – expect U.S. economic growth to accelerate over the next six months.

Fully 96% expect U.S. growth will either remain steady or accelerate in that period, Vella added, and respondents were optimistic on a number of related indicators:

  • 65% expect corporate profits will increase over the next three months.
  • 61% believe job growth will remain stable over the next six months.
  • 57% expect that housing prices will increase up to 10% over the next six months.

Even with all of those positives being taken into account, the risks posed by inflation aren’t being dismissed lightly.

For example, according to the most recent Bank of America (BofA)Merrill Lynch fund manager survey, which polled 228 such managers in early July, some 71% expect the global core consumer price index (CPI) to be higher in 12 months, up 13 percentage points since last month – marking a cyclical high for this survey.

Exposure to commodities, an asset class especially sensitive to inflation, has risen to its strongest in more than a year, added Michael Hartnett, chief investment strategist at BofA Merrill Lynch Research.

“A growing number of investors now see inflation moving above trend levels while global growth remains below-trend,” he said. “Confidence in macroeconomic performance still remains fairly high, though. A net 69% forecast that the world economy will strengthen over the next year. If growth does pick up, volatility will rise too.”

Just something to keep in mind as we head towards the fall freight season.

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