A Rising Tide
of InflationCompanies and consumers are having to face surging prices for fuel, food, and other commodities as inflation rises to its highest level in decades.
Published: May 31, 2022
Updated: June 2, 2022
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Last week marked the official end to the good times the retail sector has been experiencing since 2021 as various macroeconomic data releases and earnings announcements forced the market to reconsider their view of consumers' resilience in the face of decades-high inflation.
The emergence of a less confident, more price-sensitive consumer--especially among the low and middle income levels--poses a material near-term risk for many retailers. Unfortunately, the timing of this shift couldn't be worse for these companies because the additional cost inflation has yet to work its way through the system. For example, consumer products companies need to raise their prices to pass through the costs related to elevated food and fuel commodity prices, which have been exacerbated by the Russia-Ukraine conflict, to food retailers.
Target Corp.'s and Walmart Inc.'s earnings fell below our expectations during the latest quarter. Both companies have comfortable cushions of about a full turn in their S&P Global Ratings-adjusted leverage relative to our downside thresholds and strong cash flow and liquidity characteristics.
However, the challenges both bellwether issuers are reporting speak to the sudden and dramatic about-face underway among U.S. consumers, which--in our view--is beginning in the mid- and lower-income levels. Elevated freight and labor costs, higher markdowns, and challenges in managing inventory and in-store staffing levels amid a rapidly shifting "post-pandemic" environment are among the risks facing even our highest-rated retail issuers.
As Walmart reported, grocery sales are particularly vulnerable given the elevated inflation for food-at-home, as well as retailers' already thin margins, which leaves them with limited room to further pass on price increases to their customers without denting traffic. Meanwhile, Target's earnings highlighted what we believe is the beginning of a dramatic pull back in, or at least deferral of, discretionary purchases, including for products such as TVs and bicycles.
Total U.S. Retail and Food Services Sales
Serial Disruptions Threaten Global Economic Growth
Russia's invasion of Ukraine, a wave of COVID-19 infections and lockdowns in mainland China, relentless inflation, and tightening financial conditions have disrupted production and stifled demand, causing the global economy to stall.
READ THE ARTICLEPrivate Investors Flocking To Cap-And-Trade Markets As Prices And Returns Soar
Fund managers and other private investors are jumping into cap-and-trade markets, attracted by the promise of large returns as prices for carbon emission allowances continue to climb on both sides of the Atlantic.
READ THE ARTICLEInflation Pressures And GDP Resilience Under Scrutiny With May Flash Pmis
Flash PMI data for the U.S., eurozone, U.K., Japan and Australia will provide the first major clues as to the health of the world economy mid-way through the second quarter.
READ THE ARTICLEU.S. Real-Time Data: Higher Prices And Interest Rates Dampen Activity As COVID-19 Cases Rise
S&P Global Economics' U.S. real-time economic trackers show that high prices and interest rates, combined with a slip in mobility readings, softened economic activity in May.
READ THE REPORTRegime Shift: Is Higher Inflation Here To Stay?
What was initially expected to be a transitory period of moderately higher consumer price inflation across the globe has morphed into a phase of persistent, exceptionally high inflation rates, captured in the evolution of annual forecasts for 2022.
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Food & Agriculture
Surging commodity prices on the back of the Russia-Ukraine conflict are pushing up food price inflation in Middle East and North African (MENA) economies and could pose risks to existing sociopolitical dynamics. Five MENA countries—Egypt, Jordan, Lebanon, Morocco, and Tunisia—will be among the hardest hit by economic spillovers from the conflict because their economies depend significantly on imports of food or energy (or both), and they source a large part of their cereal supply from Russia and Ukraine.
Russia And Ukraine Are Major Food Market Exporters
Food and Energy Inflation Concerns Drive Commodities Higher in May
Record inflation prints, export embargos and import bans helped the S&P GSCI, the broad commodities benchmark, to post another monthly gain in May, ending the month up 5.1% and bringing its YTD performance to 47.0%.
READ THE ARTICLEFood Fight: U.S. Grocery Leads Retail Sectors Chewed Up By Inflation, Cost Pressures
U.S. grocery retailers and distributors, after posting stellar operating performance in 2020-2021 amid COVID-19 pandemic stay-at-home trends, could face steep margin and profit pressure in 2022.
READ THE REPORTGlobal Agriculture Markets Jittery On Worsening Food Inflation Outlook
This famous line hits home in the current play as Russia's invasion of Ukraine set open a can of worms for agriculture producers and consumers worldwide.
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The North American Leveraged Finance Poolside Chat Series will resume this year, with the first episode to take place on Monday, June 27. This summer series will feature academic scholars, eminent practitioners, and seasoned commentators in the capital and leveraged finance markets, in conversation with S&P Global Ratings' leaders.
Register NowAutos
The race to electrify the way we get around is about to get more expensive. The price of raw materials used in batteries for electric vehicles (EVs) is rising. Consequently, this is reversing a long-term trend for declining battery prices.
Recharge: Battery Prices to Reverse Their Decline in 2022
Double Digit Replacement Growth For Commercial Vehicle Parts Aftermarket
The story throughout the pandemic all tied back to material shortages in numerous industries including the commercial vehicle market. Those shortages led to higher costs in inputs, labor, and logistics because inventory was exhausted.
READ THE ARTICLEWill Prolonged Higher Fuel Prices Slow The Rebound In U.S. Transportation Demand?
Americans are used to prices fluctuating at the pump, but the recent surge in fuel prices is giving some consumers pause, and potentially affecting travel behaviors. In comparison with grocery bills, which have been increasing due to inflation but vary week to week, price changes at the pump are easily noticed by consumers.
READ THE REPORTEnergy
The G7 on May 27 called on OPEC to pump more crude and committed the group of major industrialized consumer countries to end financing for most overseas fossil fuel projects by the end of 2022, in a joint statement.
"We call on oil and gas producing countries to act in a responsible manner and to respond to tightening international markets, noting that OPEC has a key role to play," the G7 energy and climate ministers said in a joint communique following their ministerial meeting in Berlin. "We will work with them and all partners to ensure stable and sustainable global energy supplies."
G7 CO2 Emissions From Industry, Forecast
Ukraine War Sees Diesel Prices Rise As Russia's Thirsty Battle Tanks Guzzle Fuel
Russia's invasion of Ukraine is consuming more than its supply of battle tanks.
Read the ArticleIEA's Birol Warns Of High Prices 'Locking In' New Wave Of Fossil Fuel Spending
High energy costs caused in part by Russia's invasion of Ukraine should not be used to lock in a new wave of fossil fuel investments which threaten to create significant business and climate risks in the future, the head of the International Energy Agency said May 23.
READ THE ARTICLEChina Boosts Coal Output To Offset Lower Gas Imports, High Prices
China has ramped up coal production to offset declines in imports of coal and LNG amid surging global energy prices, and analysts expect natural gas consumption to contract further in 2022 while coal consumption continues to rise.
READ THE ARTICLEA collection of pre-calculated global equity selection signals. These signals, or factors, each represent a simple investment strategy supported by academic or industry research.
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