ITR Economics on CEO response to inflation [Jan. 2022 update]

In this updated interview, Alan Beaulieu, President of ITR Economics, sits down with Vistage Chief Research Officer Joe Galvin to share his thoughts on rising costs, what that means for small and midsize businesses, and how CEOs should respond.

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Transcript

Joe Galvin: I’m Joe Galvin, Chief Research Office for Vistage for The CEO Pulse. Joining us today is Dr. Alan Beaulieu, President of ITR Economics. Alan joined us last November to give us his perspective on inflation and it implications as we went through the end of the year and end the new year.

Now in January of 2022, we see inflation at record levels, at least for the last 40 years, creating an issue, a scenario that most CEOs have never had to deal with in their lifetimes. Inflation continues to be an issue. It’s growing globally. So we thought it’d be great to bring Alan back, get an update here in January, as we look forward to what it will mean through this quarter, this half of the year and into the balance of the year.

So, Alan, welcome. Thank you very much for joining us. We’re all looking forward to your commentary.

Dr. Alan Beaulieu: Well, thanks Joe. It’s always a pleasure to be part of whatever Vistage is doing. We’re proud participants in — Yeah, let’s talk about that whole 40-year-high thing for a little bit.

Everyone needs to understand, and not just the CEOs, but CEOs understand that the people working for you who are even younger, I mean, not in their lifetime, they have no idea what this is about. So it almost appears, and I don’t mean to put it out of proportion, but like another plague is upon them. What is going on here and how do I deal with all this? So let’s deal with ,it and how you can explain it to them and also internalize — and it is not eternal, it’s internal. And then we’re going to talk about why it is not eternal and what the future’s going to look like.

But first, it’s caused by circumstances beyond belief in many ways.

And that’s the pandemic, which government’s shutting down the economy all of a sudden a dam of demand built. And then the governments of the world, probably especially our own, provided all kinds of stimulus. So not only was there demand, there was the means by which to satisfy that demand. And the demand shift, because we were so many working from home, all of a sudden we wanted the things to fix up the house. And so there were specific things, computer chips were a big part of that, which led to the automobile problem. So we have the dam, we have the demand and we have the ability to satisfy the demand, which created an insatiable demand curve and supply just couldn’t keep up. Those poor folks were turning out the hours. I mean it’s not their fault. Record high output in many places.

I was just at a conference where somebody from a major global consulting firm kept talking about supply chain, and he kept going back to the one ship in the U.S. Canal as sort of a proof tax and I was lost by that. It was like, what the heck does that have to do with it? That was one ship. If I showed you a line of container shipment, that’d be less than a blip, which is my way of saying ignore the news, okay? It’s just going to highlight things that’ll get your attention. The reality is, it was a demand curve that was unimaginable.

So it did cause inflation to spike, but those are not sustainable causes. Those are momentary disruptions.

So you’re living through a 40-year high, like Joe said, you’re living through something you’ve never seen before, but it’s going to abate. And it’s going abate because demand is going to ease. We’re going to talk more about out that in February. We’re going to see that supply’s going to continue to expand. That’s evident to see. And as we do so, the pressure’s ease. So that what you’ve just lived through is hopefully a “once in a lifetime.” But the mistake would be to focus on that. And if it gave out any raises based upon a 6.2% inflation rate because you wanted to be that nice person who kept the COLA, you’re stuck with that now. Even as inflation’s going to wind itself down to 2%. You have just raised your costs significantly, especially as you have a large labor content.

So it is going to ease. Why is it going to ease? Demands going to ease in its rate of rise, supply is going to improve, prices are going to stabilize. That’s point number two.

It is going to abate, but it’s not like prices are going down.

You’re not going to see copper or steel or so many other things [like] freight go down to 2019 prices. That’s not a happening thing. Okay? There’s been a cost shift. And that cost shift means that the inflation pressures go away and flatten for the most part. You may see some mild decline later this year in ’22, but you’re not going to see anything that goes back to 2019.

So whatever your price point is today on your raw material purchase, on your finished goods purchase, that’s likely to be it. You may even see one more increase in price from your sources in first quarter ’22. And then it’s going to stabilize. Which means that you, my friends, need to be thinking, “All right. I might have one more price push I can get through this year, first quarter ’22, but then I’m not likely to get anymore. And as I’m not likely to get anymore, that means that all of a sudden I can’t take as much from the back end, especially on labor. And I have to get as ruthlessly efficient as I possibly can,” which I know here at Vistage you’ve been talking about that. Most of you were doing that.

Keep doing it. Invest in yourselves, front end, back end. Any way you can, drive as much efficiency into your system.

And I was going to say [get] labor out of your system, but what you want to do is make sure you’re not adding more labor. You just want to get the most out of everybody that you have working for you. That’s where you’re going to succeed.

Now, as this eases, the inflation goes down, that means the Fed doesn’t have as much pressure to raise rates, right? So there’s going to be that 25-50 basis points. And there may even be a third one raising the whole year by 75 basis points or so. That’s not going to rock the economy. That’s not going to do any damage. You’re going to find that there’ll be bows taken at the end of the year. Hey, the Fed rode in, saved the day. Try to remember you knew before this, before the Fed did anything. So, put it in perspective. The media is going to have a field day with interest rates going up. The stock market’s going to have a negative visceral reaction. They’ll get past that. Let the media yaber. You are going to be fine. It’s not going to disrupt your world.

It’s later in the second half of ’23, you’re going to find some more inflationary pressures building up and they’re going to be more sustainable next time around, but we’ll have a lot more chance to talk about that. In the meantime, just be mindful of the fact that energy prices are high. They’re not likely to come down, but stabilize.
By the way, as an aside, just be ever so grateful you’re in the United States, Vistage United States. Because in Europe, man, what a mess.

As you probably know, energy prices are spiking like there’s no tomorrow for two reasons. One, the governments of Europe have decided to go green. As they’ve gone green, it’s an undependable source of energy as we head into winter. And inventory levels of gas, not gasoline but natural gas, are at the lowest levels in decades. And Russia is looking likely to go and invade Ukraine. And that means that the pipeline could be disrupted. And that means what a mess.

So if you have competition in Europe, their prices are going to spike or their pain’s going to increase.

If they don’t raise their prices to U.S. customers, it’ll be a surprise.

Because as they’re having a very hard time raising prices inside Europe, because governments don’t want consumer inflation. So they’re more likely to raise facing to the United States, which gives you obviously a competitive advantage. So another reason it’s good to be you.

All right. With all that planning in mind, invest in yourselves. Don’t worry about the inflation. Labor rates are going to continue you to go up. That’s a different discussion than inflation. It’s causal. It’s a future cause. Today, we’re going to find that the rapid increase in labor costs are going to diminish because the quit rate is going to quickly diminish, go down. And I’ll show that to you in February — we don’t have time to do that today — but there are leading indicators to that. And we’re going to see the quit rate diminish for good reason and that means that your pressure on rapid increases in wages is going diminish. And as long as you work on your culture, you should be able to hire and retain people better than your competition. Won’t be easy, but it’ll be better than your competition.

All right, Joe, I think that’s pretty a good synopsis. I’m open to whatever questions you have in mind, but whatever else you want to do, Joe, I’m here for you.

Joe Galvin: Well, let’s comment on supply chain because that’s a part of this, right? The as your brother said, the economy wasn’t broke and shut down, easier to stop than to restart. There’s data that says up to 20% more containers are being processed than prior to the pandemic. How will an easing or a healing of the supply chain help bring this down and help stabilize, not just cost, but access to material goods that our manufacturers, constructions and wholesale trade people are struggling with?

Dr. Alan Beaulieu: Well, it will help when the ports like Long Beach and Los Angeles, they stopped using them as parking lots. And I liked their plan to penalize people who are using them as parking lots. They backed down on it a couple times, but trucks can’t get in and out. It’s not there are no truckers, they just can’t get in and out. It’s a gigantic mess. And so as the morass begins to clear up and, as all of a sudden, we get some movement, it’s sort of like a clog being cleared. Some particles go, the next thing you know, it whooshs through. And that’s going to be the case in 2022. It’s going to be slower than a whooshing through, but it’ll start as particles.

Joe Galvin: How long is a “whooshing through,” in fact? Is that like a new data point that I’m not familiar with?

Dr. Alan Beaulieu: It is a new data point. And suitably vague to suit local interpretation or an economist, one or the other (laughs). We’re going to find that’s just a natural reaction to people working on a problem. These people are in business, they’re smart, trucks are moving. Drivers are being hired, drivers are being paid more. The government wants to help, which may or may not be a plus. But the reality is we’re seeing more throughput. We will see even more as we go forward. So it’s just a natural reaction. Costs on containers are beginning to edge down, but they’re not going to go down to 2019 levels either. So, that’s a fixed cost that’s going to be high for some time to come.

All of which is to say, business always finds a way.

So like Jurassic Park, where life finds a way, businesses find a way, and they’re going to get through this problem and we’re all going to see that it is a slightly different world. But nevertheless, a world we recognize and can operate in. So if you’re allocating your clients because you can’t get enough product X and you’re not making some products because you can’t get product X, you’re just making a select number of products for a select number of customers, that’s great strategy now.

But be thinking about how you’re going to slowly ease those additional products back into your portfolio and how you’re going to only start opening up to those other clients that you had shut down and hopefully didn’t tick off forever. Because I think later in ’22, you’re going to be reversing trend, and you may want to start that thinking process and planning process — “All right, who’s next? Who do we go to? What product are we going to next?” — as you start to see things ease up.

And then if you’re serving the auto industry, which a good part of Vistage does, you know as well as anybody, that depends on who you are. If you’re Toyota, it’s not the same problems if you’re Ford and everybody in between. I have enough clients in that space though to know that some of them are increasing hours of production, some of them are planning on increasing hours of production.

Except for Volkswagen in Germany, it seems like most people are thinking that things are going to start getting slowly better as we go through ’22. So that when we get to the second half of this year, we are forecasting that domestic automobile production actually begins to rise. And that means that chips are showing up and those parking lots full of cars will get shipped to customers who are waiting to buy them. And obviously, that’s good for the economy.

Joe Galvin: You mentioned hiring and the risk of raising wages now and having to live with that for the future. We see 76% of our community in our Q4 Confidence Index are increasing headcount. And because hiring is so difficult, 72% are increasing wages and another 27% are adding hiring bonuses, increasing benefits, et cetera, et cetera. How does that spiral come to or at least slow or will it?

Dr. Alan Beaulieu: It slows when we get to the recession we’re forecasting for 2026, and it falls apart when we get to the Great Depression of the 2030s. But in between, it’s self-fulfilling in that that is an inflationary spiral you just described. And we have to do it. I mean, we have to pay more. We all go through it. But we also understand what we’re creating and it’s just not a darn thing we can do about it as we go forward until the economy breaks. And when it breaks, it resets.

Joe Galvin: You’d mentioned to ignore the media and now inflation’s become a talking point and you can’t turn on the TV or pick up a newspaper without having one side or the other describe inflation. How do I avoid that noise? And what do I look for as I’m trying to monitor myself before I get another chance to listen to you?

Dr. Alan Beaulieu: Yeah. Well, how do you ignore it is not so hard. It’s just what do you look for. And what I would encourage you to do is use the rate-of-chain methodology to track prices. And you can do that with producer pricing to see just what’s most important. Do not use the generic PPI if you can avoid it, but use the one that’s specific to your industry, and there’s one for everybody ,and then use the specific CPIs and use the rate of change on them, look at the 3-12.

So while the media is concentrating on — and they just drive me nuts with this, Joe, you know how it works — they will concentrate on the latest data point. They will ignore the fact that the rate of rise has been slowing and the rates of change are showing a tipping point is right around the corner. So you’ll gain an intellectual advantage and you will put things in context. I just wrote a blog about this, about putting things in context. It was about retail sales for December and employment for December because the media had it all wrong. So when you put it in perspective, it’s like, “Ah! Oh, okay. The economy’s not stumbled. It’s still growing and things are just falling into line in terms of an acceptable growth rate.” So do the same thing with inflation, and it’ll work for you.

Joe Galvin: Well, and thank you so much. Again, everyone go to the ITR website, read the blogs. I do it whenever something new comes out because it’s always so insightful. And because it’s down the middle, pure economic theory. You can count on it based on facts and data.

I’d also call your attention to February 18th where we’ll get a full hour of Alan’s time talking about all things economy as he gives us an update to look forward into 2022. Alan, thank you so much for your time. We’ll look forward to hearing from you on February 18th. And thanks everyone for tuning into The CEO Pulse.

Interview was edited for clarity.

Related resources 

The CEO Pulse: Inflation

2/18 Webinar: ITR Economics on the road ahead

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