Inflation may be back, but it is less clear what winners and losers it creates. Money printing and lockdown savings are combining with pent-up demand, arming consumers to pay more. Many companies also need to restock. But supply has been constrained in areas ranging from lumber to semiconductors, triggering price spikes as economies re-open.
It is not clear that this inflation will actually become embedded and a long term problem. Investor assumptions about how the rotation to value plays out could also prove misplaced. Bad companies may have a good year but that need not make them good businesses or attractive long term investments.
Bottlenecks might bring trouble for some manufacturers. We can expect some initial jumps in profit in industrial areas, but that could quickly give way to disappointments from companies if supply disruption hits production. Industrials are currently in favour, but it may be that the more scalable consumer services - dependent primarily on labour supply - are actually better placed. The value rally could give way to a more balanced appreciation of business risks as economies re-start.
We can expect price rises to choke-off some of the upsurge in demand. And the next few months may bring some profit warnings from companies hit by the severe problems in semiconductor supply. Chips are vital components in many large products such as cars, but for a few months there may simply be no solution for some manufacturers other than shuttering production lines.
Even where supply can be maintained, but at a higher price, it may not be possible to pass additional costs onto customers. Many products that take months to complete involve the supplier essentially being short of inflation. That is, needing to bear unforeseen cost increases that only emerge after a project starts. Services are now so dominant in developed economies that it is easy to misunderstand the dynamics in manufacturing. Investors need a balanced approach even as inflation picks up.