Wall Street isn't so sure inflation will be transitory

Despite the hottest reading on inflation since August of 2008, with consumer prices jumping 5.4% in June year-over-year, the feeling within the Biden administration is inflation will be transitory as speedy vaccinations have Americans returning to their normal routines at a faster clip. Yet, it may stick around for a few quarters vs. months. 

The transitory view aligns with Federal Reserve Chairman Jerome Powell, but Wall Street may not be so sure. 

With the second-quarter reporting season underway, investors will likely apply the pressure on CEOs during earnings conference calls to explain where inflation stands and whether costs will continue to rise, and for how long. 

Currently, S&P 500 companies are sitting pretty as margins hover at a record high of 11.9%, as tracked by Goldman Sachs. This as U.S. stocks hover near record highs albeit lower during Tuesday's session. 

Now, the firm wonders if companies will boost costs to maintain these numbers that could fuel inflationary trends. 

"Though investors remain focused on the forward margin outlook given rising input costs. Global shipping woes, raw material inflation as well as acute shortages in both labor and semiconductors have combined to increase costs for companies across the economy," the firm wrote in a research note published Monday. 

USED CAR PRICES STEER TOWARD FED CHAIRMAN POWELL’S INFLATION HUNCH

"In the face of rising input costs, companies have been defending margins by raising prices and passing higher input costs to their customers. In our 1Q Beige Book, many companies discussed price increases and we expect this trend will continue during 2Q earnings." 

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These investor conservations will likely hold clues as to how long inflation will stick around or when it may hit the road. 

General Mills and Constellation Brands have already signaled prices hikes lie ahead, as reported by FOX Business. 

GENERAL MILLS, CONSTELLATION BRANDS SOUND INFLATION ALARM 

"We would anticipate prices going up," General Mills CEO Jeffrey Harmening said on the company’s fourth-quarter conference call earlier this month. 

General Mills, whose brands include Cheerios and Betty Crocker, expects total input cost inflation of about 7% during the current fiscal year. Constellation Brands, maker of Corona beer and Svedka vodka, signaled a similar message. "We expect significant inflation headwinds to ramp up during the second half of our fiscal year," said CFO Garth Hankinson.

POWELL USES LUMBER TO EXPLAIN INFLATION PATH

Powell, who was peppered with inflation questions following the Fed’s June meeting, used lumber prices as a lesson on how transitory prices work. 

Lumber has declined over 30% from an all-time high of $1711.20 per thousand board feet, now trading around $685, as tracked by TradingEconomics. 

Powell also indicated used car prices, which have soared to record levels, should follow suit. 

His prediction may be coming full circle. In June, used car prices pulled back 1.3%, according to auto auctioneer Manheim.