Cracks in the Veneer

After massive government intervention in labour markets and mandatory vaccination policies to help mitigate the effects of the pandemic, some industries are struggling to find or keep quality personnel to fulfill their business purpose. You are hearing about global product supply chain delays caused by regional COVID-19 lockdowns in manufacturing of tens of thousands of products from computer chips and baby toys to cars and industrial machinery.

Before the onset of the COVID-19 pandemic, the world’s businesses had transformed through global trade and “just in time inventory” techniques to rely on getting what inputs they needed just when they were needed, rather than stockpiling inefficient inventory subject to devaluation or obsolescence. They relied on free trade with low-cost labour markets supplying manufacturing and linked modal transportation systems to deliver everything in a timely fashion. Unfortunately, this system was already strained during full employment, even before a pandemic induced supply-demand imbalance tidal wave swept through the system.

Pent-up demand has suppliers from retail to manufacturing awaiting delayed parts or finished products wanted by their customers. Demand is driving prices higher, the transportation snafu is largely labour-based, and wage inflation is not transitory.

In Canada and the United States, the Canada Emergency Response Benefit (CERB) and the Paycheck Protection Program (PPP) government initiatives distorted the labour markets and allowed many workers to stay home at comparable or better cash flows than working. As a condition for qualifying for government assistance, businesses in some industries were required to furlough workers. Workers in all industries (especially low-wage jobs) are leaving in record numbers, or choosing not to return to work from furlough, or retire. More people (4.9M) quit their job in August 2021 than in any month in 20 years; in fact 2.5 times more than were laid off. Businesses are having a hard time finding quality personnel, whether it be hospitality, transportation, health care, or other essential services. To compete, businesses are offering interview inducements, signing bonuses, and, ultimately, higher wages (some of them government-mandated). These wage hikes will not be transitory and will show up in higher priced goods and services across our consumption spectrum.

If you drive, heat your house with natural gas, or have a barbecue, you are already experiencing significant price inflation due to fossil fuel shortages. Unfortunately, it is likely to get worse.

Truckers are a huge part of the supply chain in North America. Whether independent or corporate, their fuel and maintenance costs are also going up. The American Trucking Association estimates there is currently a shortage of 80,000 truck drivers in the United States.

As I write this, I am flying back from a global financial planning conference in the United States. The airlines are a case in point of current demand exceeding their staffing ability to respond to unforeseen shocks (weather, maintenance). Southwest Airlines had to cancel thousands of flights in October due to staffing shortages. The talent supply shortage will cause wage inflation and the resulting shortage of flights, despite equipment being available, is already causing price inflation in travel costs.

The best way to invest for inflation is to own businesses that have pricing power for their goods and services. You know the ones you use that you can’t do without; those will cost more. The equity portion of your investments is designed to grow beyond inflation. High-quality businesses that provide the things we want, and are willing to pay more for, will continue to thrive. 

The views expressed are those of the author and not necessarily those of RGF Integrated Wealth Management, which makes no representations as to their completeness or accuracy.

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