While consumers are accustomed to coping with rising prices for major commodities during COVID-19 and have greater spending power as the labor market recovers strongly, expectations of higher inflation will lead to higher wage demand.
“The real inflation challenge that everyone is going to face is labor,” said one retail executive. “We can deal with rising product prices, but trying to get people into low-skilled jobs is much harder.”
Companies have warned that the cost of goods ranging from mince pies to chocolates will rise by as much as 20 per cent or have already risen, while Qantas has warned that the cost of airfares could rise by about 7 per cent in the coming months.
Mr Sherwood said he had been predicting such a shift for some time, but Russia’s invasion of Ukraine in February and the protracted conflict prompted him to make them ahead of schedule.
His comments echoed similar warnings from Reserve Bank Governor Philip Lowe, who told a bank meeting last week that higher prices could pay for higher wages.
“Companies are reluctant to raise prices because they don’t want to raise prices, so they don’t want to raise wages,” Dr Lowe said. “It’s likely to see this psychological shift during a prolonged period of headline inflation, where companies will decide they have to raise prices and if prices do, they can afford to pay higher wages.”
Russel Chesler, head of investments and capital markets at VanEck, said companies are not going to stop them from passing on those inflationary increases to where.
“The companies that have the pricing power will pass it on … the companies like Woolworths and Coles will inevitably pass it on to consumers. We expect a fair amount of food inflation,” Mr Chesler said.
“Especially because our fuel prices went up and then our wheat prices went up by about 35% after the crisis between Russia and Ukraine.”
Infrastructure is more secure
Still, analysts remain optimistic about the earnings outlook for infrastructure companies such as toll roads, despite soaring fuel prices. Shares in Transurban and Atlas Arteria have been rising since early March, with both stocks up 5% over the past two weeks.
Macquarie analysts believe higher fuel prices will reduce Transurban traffic by less than 2 per cent, pointing to research by academics from the Australian National University showing the biggest hit from rising petrol costs is freedom outside peak hours and weekends travel.
Rising demand for toll roads could also soften the impact on Transurban as pandemic-related restrictions ease and more people drive to work, the bank said.
Macquarie cut Transurban’s EPS forecast for 2022 to 2024 by about 1%, but raised its 12-month price target slightly to $14.96 and maintained an “outperform” rating.
Trucking and logistics groups that use the Transurban toll road have been passing on higher petrol prices to their customers, charging fuel taxes.
FedEx-owned TNT Express raised its fuel surcharge in the Asia-Pacific region to 30.5% this week, up from 25.5% last week and 21% at the end of December.
Simon National Carriers, a freight group that transports products including timber and equipment across the country, has a 33% fuel surcharge on heavy cargo weighing over 10,000kg.
Toll Global Express has charged a 22% fuel surcharge on priority packages since early January.
Toll road companies also often have operating contracts that allow them to increase tolls based on (or higher than) inflation.
Wages and inflation are key battles in travel
Inflation could theoretically depress travel demand, but pent-up demand could outweigh consumer concerns about higher prices. In the long run, however, these dynamics could put pressure on travel companies.
“You’re coming out of a two-year period of no travel — very limited on both a domestic and international level,” said Peter Drew, an analyst at Carter Bar Securities.
“Interestingly, there is a lot of pent-up demand for both leisure and business travel [and] Our view is that in the short term you will see a peak in travel.
“This makes it difficult to measure the impact of inflation on travel,” he said.
Mr Drew added that other factors included how wages were rising compared to inflation.
But what overshadowed the inflation thesis, he said, was the possibility of higher interest rates over the next 12 months and any subsequent squeeze on holiday discretionary spending.
“We think people may be more cautious about raising rates and the impact on household budgets,” he said.
Overall, the business travel market has historically been more closely linked to economic growth, he said. That means worries about interest rates hitting the budget are more likely to weigh on leisure travel.
While higher fuel costs add to the cost of motorhome travel, Mr Drew said if “the rental deal is attractive, there will be some offset” and it’s not a huge issue.
“It makes the holiday more expensive, but … it’s not fatal,” he said.
He said fuel costs could dampen appetite in the short term, but the impact could be more short-lived given its connection to the war in Ukraine.