What analytical language tells us about inflation



Wednesday 10 November 2021 12:37

With the Consumer Price Index (CPI) at a 13-year high in the United States, it’s no surprise that companies are talking more about inflation.

It’s not just business surveys that show this to us. You can also see it by looking at the transcripts of what the management teams of publicly traded companies talked about on the earnings calls.

Of course, it would be a painstaking exercise to manually go through thousands of income statements each month. This is where Natural Language Processing (NLP) analysis comes in. NLP uses the power of computers to obtain information from the text of written documentation. Simply put, you can track the number of word and phase mentions that appear in the transcripts.

Working with the experts in our Data Insights Unit (DIU), we find that there has been an unprecedented amount of discussion about inflation among US businesses recently compared to the past. Meanwhile, corporate management teams seem more concerned with inflation than wages. Regarding supply chains, mentions of bottlenecks and disruption have jumped due to the Covid pandemic.

Inflation talks among U.S. companies have increased

Over the past 15 years, American businesses are certainly talking more about inflation now than they have ever done before. Chart 1 shows the number of mentions in the earnings transcripts of the word “inflation” along with one of the words “increase”, “increase”, “higher” or “pressure”.

So how does this inflation talk compare to the headline CPI rate? Before using the inflation statements, we adjusted the time series. This is because the time series is volatile and seasonal in nature as the number of calls and win transcripts generally declines towards the end of the winning season.

Chart 2 shows that inflation statements generally reflect movements in the real inflation rate. In other words, discussions between companies about inflation confirm what is being observed in the economy at large.

Although inflation mentions do not appear to be a major predictor of actual inflation, the data is available daily in real time. So, there is a bit more information provided by the transcripts before the main CPI is finally released in the month. Examining the discussions on inflation across all industries also provides some interesting insight.

Have American companies talked about wages?

By repeating the same analysis but for the mentions “wages”, we note that companies have discussed more wages this year. In general, mentions of “wages” have moved in step with the growth in median wages in the United States, although the latter has accelerated to return to pre-pandemic levels (Figure 3).

The discrepancy may be due to the fact that company management teams have been less concerned with wages, or because other terms are used to refer to wages.

Obviously, companies are mentioning wages more frequently this year, but the key word in the conversation is inflation (Chart 4).

Taken at face value, it seems that company directors are not so concerned with wages. But if we see a significant pick-up in salary mentions over the next few months, that would be a sign that companies are more worried about the second-round effects of inflation.

Meanwhile, there are sector differences as the divergence between the inflation and wage mentions is less marked in some sectors (which is discussed in the next section).

Which sectors are talking about inflation and wages?

We find that companies in certain sectors, such as industrials and consumer discretionary, constantly talk about inflation and wages over time (Chart 5). But that doesn’t mean other sectors don’t have a lot of conversation about inflation and wages.

In fact, companies in most sectors are discussing inflation and wages more than in the past (Chart 6). To compare with history, we standardized the latest observations on “inflation” and “wages” mentions and compared them to the history of the past three years (this captures data prior to the pandemic).

The management of health care and financial companies has been most active in commenting on inflation and wages. For consumer discretionary and staples companies, we talk a lot more about inflation than wages during earnings calls.

In comparison, communication services companies have been more frequent in their discussions about wages than about inflation. This can have an impact on the profitability prospects of these companies.

Significant increase in supply chain discussions

Unsurprisingly, the Covid pandemic has led to a significant increase in discussions among businesses about bottlenecks, disruption and supply chain issues (Figure 7). This coincided with the increase in supplier delivery times as measured by Purchasing Manager Indices (PMI).

Meanwhile, discussions on supply chain issues have focused on the consumer discretionary and industrial sectors. Within manufacturers, the automobile industry has been mainly impacted by the shortage of semiconductor chips. In the United States, the positive contributions of car prices to the rate of core inflation are reaching all-time highs.

Looking ahead, one of the main discussions to watch is what companies are telling us about supply chain bottlenecks. If we start to see less talk of these disruptions, then there might be welcome relief ahead for the parts of inflation that have so far proven to be the most stubborn.

Important Information: This communication is marketing material. The views and opinions contained in this material are those of the authors of this page and do not necessarily represent the views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for informational purposes only and is in no way intended as promotional material. The material is not intended as an offer or a solicitation to buy or sell any financial instrument. It is not intended to provide and should not be used for accounting, legal or tax advice, or investment recommendations. The opinions and information contained in this document should not be relied upon when making individual investment and / or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risk, including the risk of possible loss of capital. The information contained in this document is believed to be reliable, but Schroders does not guarantee its completeness or accuracy. Certain information cited was obtained from external sources which we believe to be reliable. No liability can be accepted for errors of fact obtained from third parties, and such data may change with market conditions. This does not exclude any obligation or liability of Schroders to its customers under any regulatory system. Regions / sectors shown for guidance only and should not be taken as a recommendation to buy / sell. The opinions expressed in this document include forward-looking opinions. We believe we base our expectations and beliefs on reasonable assumptions within the limits of what we currently know. However, there is no guarantee that any predictions or opinions will be realized. These views and opinions can change. Since you are in North America, this content is published by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and an SEC registered advisor providing investment management products and services. active to clients in the United States and Canada. For all other users, this content is published by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered under No. 1893220 in England. Authorized and regulated by the Financial Conduct Authority.


Leave A Reply

Your email address will not be published.