Grant's Interest Rate Observer

INFLATION?

Keep on growing

An upbeat turn in the fortunes of U.S. employees, from deep in the heart of Texas:  Fast casual dining chain Texas Roadhouse, Inc., which employs about 52,500 people according to its most recent form 10-K, provided investors with an eye-catching data point in yesterday evening’s third quarter earnings release. In its full-year outlook, management raised its forecast for labor inflation to a range of 7% to 8%, up from previous guidance of mid-single digit growth. A decline in third quarter restaurant margins was likewise attributed to the higher costs associated with compensation increases. 

Chief financial officer Scott Matthew Colosi noted the broad-based advance in wages on the earnings call:  “All over the country, you hear how challenging it is with unemployment being so low to – you’re competing for talent. And so you’re having to pay almost in every position more than you did even a couple of years ago.”  Tonya Robinson, vice president finance and investor relations, added: “And actually, you hear more and more people talking about that even outside the restaurant industry.” Chris Kempczinski, president of McDonalds USA, LLC proffered a similar observation on Oct. 24: “There is some commodity inflation, but the biggest drag that we’re facing right now is related to the labor investments that are being made.”

Labor staffing companies have also remarked on an apparent strengthening in overall conditions this quarter. On Oct. 24, Robert Half International, Inc. chairman and CEO Harold Messmer noted a catch-up dynamic: “Clearly we’re seeing clients starting more projects. They’re spending more money. They have more sense of urgency. Their existing staff [has been] lean because they’ve held a line so far during this recovery. So, there’s some pent up demand that results from that.”  Manpower Group, Inc. CEO Jonas Prising laid it out even more plainly on the company’s Oct. 20 call: “The labor market in the U.S. is extremely tight, [it is] hard to find people.”  

One potential reflection of the improved outlook in wages is the market’s assessment of Manpower itself.  Shares in the staffing company have gone on a rampage of late, shooting higher by 120% since July of last year, compared to a 23% gain in the S&P 500 in that period.

Anecdotal but broad inflationary sightings are popping up beyond the realms of labor and wages. Darius Adamzyck, president and CEO of diversified manufacturer Honeywell, Inc. commented on the company’s Oct. 20 call: “Overall we’ve probably been more challenged on the cost side this year than we’ve seen in a while.”  Thomas J. Falk, CEO of consumer packaging giant Kimberly-Clark Corp. on Oct. 23: “Our commodity inflation estimate has increased somewhat from three months ago.” His colleague, CFO Maria Henry, chimed in: “It is a stronger inflation than we were expecting.”  Jon Moeller,  CFO of Procter & Gamble Co., identified an unexpected rise in chemicals prices on Oct. 20: “We knew we’d see higher pulp price cost going into [the] year, these costs have continued to increase beyond initial forecast ranges. Ethylene, propylene, kerosene, and the polyethylene and polypropylene resins have increased recently.”

There are some limits to this evidently broad-based inflationary uptick. Bloomberg reported this morning that Best Buy Co. halted its sales of “un-activated” Apple smartphones (meaning not set up on a specific carrier network) amidst customer backlash, after the electronics retailer priced its iPhone X and iPhone 8 inventory at $1,099 and $1,249 respectively, each a $100 premium over the quotes supplied by Apple.