This time last year the big inflation debate was ‘transitory versus structural’. Now that we know the winner (clue: it wasn’t transitory), the question today is how much demand destruction it will take to bring inflation back down to central bank targets.
The bottom-up view is that we may at least have reached the end of the beginning. Every month we ask Fidelity analysts what they think will happen with labour and non-labour costs at the companies they cover over a six-month time horizon. Global expectations for non-labour costs eased again in September, continuing a trend that started in March, while those for labour cost rises have reached a plateau.
Chart 1: Cost inflation remains elevated but expectations have stopped rising
Chart shows proportion of responses reporting costs are expected to increase minus those reporting costs are expected to decrease; significant increases and significant decreases receive a higher weighting. Question: “What are your expectations for total labour/non-labour costs over the next 6 months compared to current levels?” Source: Fidelity International, September 2022.
Broken down by region, analysts now expect slower growth in non-labour costs everywhere except Europe.
Chart 2: Non-labour cost pressures have started to ease
Chart shows proportion of responses reporting costs are expected to increase minus those reporting costs are expected to decrease; significant increases and significant decreases receive a higher weighting. Question: “What are your expectations for total non-labour costs over the next 6 months compared to current levels?” Source: Fidelity International, September 2022.
“The majority of commodity inputs peaked earlier in Q3,” notes one analyst who covers North American consumer discretionary firms. “Transportation bottlenecks are easing, leading to a material decline in freight rates. Semiconductors are becoming more available, meaning fewer inventory outages, leading to smoother production which means lower costs.”
Expectations for labour cost growth meanwhile fell month-on-month for several regions, with Europe again an exception.
Chart 3: Wage growth expectations appear to have stabilised
Chart shows proportion of responses reporting costs are expected to increase minus those reporting costs are expected to decrease; significant increases and significant decreases receive a higher weighting. Question: “What are your expectations for total labour costs over the next 6 months compared to current levels?” Source: Fidelity International, September 2022.
However, there is still evidence of labour market tightness, especially in healthcare and financials.
“There are significant talent retention and attraction issues across most sub-sectors,” says one healthcare analyst. “This is particularly pronounced in the US and is across both skilled and relatively lower skilled labour.”
“Cost of living increases haven’t really hurt white-collar workers yet,” adds one Europe-focused financials analyst. “It will become an issue in ’23, so companies need to adjust salaries accordingly.”
To read more about the article, you can go on our website: Analyst Survey: Cost pressures hit a plateau (fidelity.be)