The Industrial Heating Equipment Association (IHEA) economic reports always make for fascinating reading as a summary about manufacturing (and consequently heat treating) in North America.

Through the first part of this year the economy was booming at a most impressive rate. The consumer was enjoying the opportunity to resume their previous patterns and there was activity in almost every sector. At the same time there was that old adage – “be careful what you wish for, you just might get it.” All that expansion resulted in a surge in inflation the likes of which had not been seen in over two decades. The “real” rate has jumped to over 5.0% and the “core” rate has been over 3.0%. This inflation rise has created concern among consumers and investors but there has yet to be a dramatic reaction from the Federal Reserve. Therefore, the questions are how long does this inflation surge last and how bad does it get before calming down?

There are many sectors puzzling over the path of inflation, but none seems to have been as sensitive as manufacturing as most of those commodity hikes have been felt here. Throughout the year the Fed has insisted the inflation rate is transitory. They assume the pace will slow and the rates will fall back to levels more familiar and the reason they make this assertion is that much of the inflation has been created by commodity prices. It has been obvious that these prices have been soaring all year – lumber was at an all[1]time high in mid-summer, steel has been up dramatically and so was copper and aluminum. These hikes corresponded with similar spikes in the price of oil. The good news is that these price hikes were a response to a demand-driven shortage as opposed to a “real” shortage.

Now that assumption has been challenged as we are now in the midst of a real energy crisis. The 500% hike in natural gas prices in Europe have cascaded through the US and the world in general. The per barrel price is now above $80 and could head higher. The shortage that creates the most difficulty is the one where there is simply not enough capacity to meet the need. A demand-driven shortage means that suppliers and producers have been taken somewhat by surprise by the demand and are struggling to keep pace. The point is that they can catch up with that demand and will.

The Fed assumed that once suppliers geared up the prices would start to fall and indeed that was the case with lumber and lately with steel as well. There is no expectation that prices will tumble back to those abnormally low levels in 2020 but they will likely be back to 2019 levels by the end of the year. The Fed has asserted consistently that this is transitory and by that they mean this is driven by demand shortages and when the suppliers catch up the end of the inflation threat will be near. If the recovery had been proceeding as it seemed to be through the early part of the summer the expectations regarding the supplier recovery would be clearer than they are now. That recovery has been thrown into question by the return of the virus threat.

This will extend that shortage situation and will leave prices high. On the other hand, the demand could utterly collapse as it did in 2020 and inflation would grind to a halt as nobody would be in a position to buy anything. Not since 2020 has there been this level of uncertainty and confusion. The Federal Reserve has not yet suggested they intend to do anything substantial to address inflation (such as hike interest rates). They have started to reduce their support for the economy – a tapering of their activity in the bond market. This will not have much of an impact on inflation at this point. The other motivators for inflation have been wage hikes and a surplus of money in the system. Thus far the wage hikes have not pushed inflation much. There has been consistent wage inflation in areas where skilled workers are in short supply but generally the workforce has not been in a position to leverage.

The money supply issue has been a concern as it was estimated there was close to $5 trillion in excess savings around the world earlier this year. That amount has declined by over half as people spent during the summer but it is still an overhang. The presence of excess cash and cheap access to loans means that people and businesses can ignore inflated prices to some degree. At the end of the day all people want to know is how high inflated prices will go and how long with that inflation last. A concise answer is near impossible to give but the best estimates hold that inflation that was supposed to reach its peak this year may keep surging into the remainder of the year and into 2022.

Opening Index Analysis IHEA’s Executive Economic Summary New Automobile & Light Truck Sales New Automobile & Light Truck Sales The frustration is shared by both the automobile producers and the potential buyers. Millions of vehicles are clogging up parking lots all over the country as they wait for the computer chips needed to complete the manufacturing process. Dozens of auto assembly plants have been idled waiting for the parts and assemblies that have been in short supply for months and there is not much change on the horizon. Demand for these vehicles remains high as consumers have the money and are now worried about future inflation but the supply chain crisis limits everybody. When does this all end and what impact will that have on sales?

The best estimates are that supply chains will start to turn towards normal no earlier than second quarter of next year. The vehicle dealers have pre-sold millions so the first allocations will be snapped up quickly. The expectation is that when the parts do show up and production resumes there will be a quick surplus situation until the consumer has time to react and start buying again. The average age of a vehicle in the US is now well over twelve years and that is the highest level seen in history. There is pent up demand and once the vehicles are available there will be plenty of eager buyers unless the inflation issues build to the point that people lack the cash to pay for vehicles when the average price is over $41,000

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