Inflation is back! What alternative data points companies should be watching
Geospatial data is helping those in the food industry preempt low produce yields, timber theft data is helping housing professionals anticipate rising rents, and property valuations, while crowd-sourced review site monitoring is helping those in the travel sector build offers tailored to consumer sentiment, and demand
In this article we will discuss:
- What is driving inflation in the US?
- Which sectors are being hit the hardest?
- The alternative data points you should be closely monitoring
What is driving inflation in the US?
Global inflation in general, but especially in the U.S. is reaching rates last seen in 1996 with core inflation at a rate of ~3% without energy and food which tend to be very erratic (or 4.1% when these are accounted for). The month of May has been especially explosive seeing a steep rise in core consumer prices of 0.9%, one of the highest monthly increases in almost 40 years.
US Bureau of Labor Statistics – The Consumer Price Index For All Urban Consumers (CPI-U) inflation Chart since 1989
These are the key forces driving inflation
One: A weak labor market
Unemployment is officially being reported as 6% but in actuality it is closer to 9%. This discrepancy is due to ‘misclassifications’, according to The Federal Reserve. In actuality politicians want to paint a picture of a recovering economy while employees are slow to return to their pre-pandemic jobs. Most would-be-workers are reluctant to return to work due to:
- Fear of infecting, and being infected with Covid-19
- Taking care of dependents (parents or children)
- Receiving stimulus checks, and unemployment insurance
As businesses across the U.S. start to reopen they are in dire need of labour which just isn’t there leading to some restaurants offering $1,000 bonuses if new employees stay for a minimum of 90 days. Lack of employees, and worker demand for higher monetary incentives to work are being carried over to the end-consumer, and driving the cost of consumer goods/services up in a way that is conducive to an ‘inflation economy’.
[Source: The Wall Street Journal]
Two: Supply chain disruptions
Manufacturers, retailers, wholesalers, and shipping companies will remember this period of history as a series of unfortunate supply chain irregularities. The first in this series was the Coronavirus which led to factories, transportation, and stores being shuttered or limited in capacity. Other disruptions included unexpected events including:
- The Suez Canal incident in which a Taiwanese mega-container cargo ship, The Ever Given, got stuck diagonally across the Suez Canal effectively cutting off one of the world’s main shipping arteries for days. With 12% of global trade passing through its waters annually, the debacle had a direct impact on global shipping prices and disrupted supply chains, creating shortages in consumer goods, and driving prices up.
- The Colonial pipeline cyber attack, as well as breaches of other key infrastructure networks by vigilante hackers. Colonial supplies over 50 million Americans with their fossil fuel needs along the Eastern Seaboard. This ransomware attack directly resulted in spot shortages of gas, oil, and diesel, as well as the rise of fossil fuel prices.
Three: Low interest rates
With high unemployment rates, and shuttered businesses, the Fed is trying to stimulate growth in the economy by:
- Keeping interest rates low (0 to ¼ %)
- Driving ‘healthy inflation’ of ~2%
- Heavy monthly asset purchases ($80 billion of Treasury securities, $40 billion in mortgage-backed securities)
But the Fed’s efforts combined with the economy’s natural reopening on the tailwinds of widespread vaccination across the U.S. may be leading to the ‘economy overheating’, as Janet Yellen, The Secretary of The U.S. Treasury recently said. Her comments are contradictory to Fed policy as plans remain strong to keep interest rates near zero through 2023, and ‘cheap money’ will most likely drive inflation way above the Fed’s 2% target.
[Sources: CNN Business, Business Insider]
Four: Vaccinated shoppers
To date, the American COVID-19 vaccination effort has been a relative success with:
- 292 million doses administered
- 134 million people fully vaccinated (i.e. 40.7% of the population)
This means that more businesses are reopening, and that more consumers are traveling, shopping, and working at, and commuting to physical locations. But this is creating a tricky situation because as I mentioned above supply lines have been disrupted, and employees are slow to return to work, on the one hand. On the other hand demand for goods, and services is on the rise. And when demand outstrips supply, prices rise, and the currency (in this case the US Dollar) is devalued because consumers, and businesses can now buy less with each of their dollars (i.e. decreased buying power).
Which sectors are being hit the hardest?
According to a recent global price gauge report, the US is experiencing an especially high rise in the dollar amount being charged for consumer goods, and services across the board. This is especially true when compared with its European, and Asian counterparts.
Prices charged for consumer goods
Here are the most heavily impacted consumer goods (these are all in comparison with pre-pandemic 2019 price averages):
- Used cars: 10-15% increase in sticker prices [Source: CNN Business]
- Gasoline: The national average is currently $2.72 per gallon which is 28 cents higher than gas prices in may of last year or a 12% hike [Source: Patch]
- Food: The average price of food (both outside, and inside the home) grew at a rate of 2.4% YoY in 2021, and by a whopping 3.9% in 2020. For reference, 2019 saw only a 1.9% food inflation rate. [Source: U.S. Inflation Calculator]
- Lumber (housing): 400 % increase, from around $400 in 2019 to ~$1600 currently [Source: CNN Business]
- Travel: Domestic U.S. fares are up 9% since the beginning of April 2021, while international fares are up 17% [Source: CNBC]
The alternative data points you should be closely monitoring
Let’s look at some of the previously mentioned consumer goods/sectors, through the prism of alternative data sets that can be collected by industry players in order to get a real-time picture, and information advantage over other competing entities:
Food alt data
The food price hike is due to multiple variables including:
- High transit costs
- Expensive, and scarce labor
- Winter storms, and summer droughts that disrupted beef production
- Meat, and poultry prices that were driven by higher feed costs and stronger international, and domestic demand.
- Higher prices for sows made weaker by pork production
- Low yields of Citrus fruits including Oranges in Florida, Lemons in California, and Grapefruits in Texas
Now let’s take a look at some alternative web data that could prove invaluable to supermarkets, and other businesses in the food industry:
Geospatial, and satellite imagery data
Had companies had early access to satellite imagery, this year, of produce fields across the US, as well as early data regarding harmful weather patterns, they could have been better prepared. This could have been in the form of opening early negotiations with farmers on this year’s harvest, beefing up imports, or potentially adjusting prices to be lower to end consumers, and averaging down costs for consumers with medium to large purchase baskets.
Crawling job directories
As we demonstrated, the government has a vested interest very often to paint a picture of ‘economic recovery’, and ‘high employment’, by playing with how unemployed people are classified, for example. It is for this reason that many companies prefer to not rely on government data but rather collect user-generated data in order to assess the state of their industry. By crawling sites with job openings, job directories etc, people in the food industry could get an early picture showing a sharp, unfilled demand for:
- Produce packers
- Farm hands
- Truck drivers
This would have given ample warning to address expected upward price fluctuations, as well as managing/synchronizing stock levels across bricks, and mortar locations, as well as digital Points of Sale (PoS).
Lumber (housing) alt data
Lumber is a key component in the housing market, which is why when the price of lumber goes up, the cost of new projects goes up, with the rest of the market following suit. Some of the main factors contributing/related to this upward tick include:
- Sawmills shutting down or shuttering their doors due to COVID
- Delayed construction
- Overly complex renovation projects
- Lumber futures skyrocketing
- Severe lack of labor
- Demand outstripping supply
- New construction rental prices rising (by $119/month on average since 2019)
- Lumber theft is on the rise
[Source: CNN Business]
Going after completely unique alternative web data is what can give people in the real-estate industry including investors, builders, and realtors a real ‘information advantage’ over competitors – here are two examples:
Lumber theft data
Identifying a spike in lumber theft cases early on can be a great early indication of lumber scarcity. By crawling:
- Posts, and contractor groups on social media
- Publicly available data from police departments, and other law enforcement agencies
- As well as search queries on engines for related topics (e.g. Long tail keywords such as: ‘what to do if lumber was stolen at my construction site?’)
Will allow you to take preemptive, strategic decisions such as stockpiling lumber, adding lumber futures to your hedge fund’s portfolio or reopening/re-establishing connections with dormant sawmills.
Scanning rental price data
Scanning sites like Zillow, Redfin, and others that are popular with American renters can also be an early indication of lumber prices, and a heating up property market. When the cost of building new homes goes up, contractors typically ‘forward’ this hike to rental consumers instead of biting the bullet themselves. This data can help tip off private equity or realty businesses managing passive income property portfolios. This can also help contractors, and management companies to hold off on signing long-term leases until prices have ‘swelled sufficiently’.
Travel alt data
As leisure travel rebounds in the U.S., the cheaper prices seen at the height of the pandemic are dissipating in favor of much higher price tags both for hotels, and flights. Some contributing factors include:
- An increase of 30.1% in transportation costs mostly due to rising gas prices
- Though business travel has yet to rebound, there is a lot of pent up leisure travel demand from people who want to visit relatives, and just ‘get some air’ after months of lockdown isolation (TSA daily screenings in 2019 averaged 2.25 million per day, 2020 had an average of 100,000 daily screening while April 2021 saw an average of 1.5 million, indicative of a sharp rebound)
- High U.S. vaccination numbers have reinstilled consumer confidence in travel alongside easing in state, and federal travel restrictions
- Airbnb, and other accommodations are also on the rise due to increased demand (before the pandemic the price was $185/night on average, in 2020 it averaged $194/night, yet in July/August of 2021 the average cost of an Airbnb stay in the U.S is now $220/night). Private apartments/homes are also the preferred choice by travelers for ‘social distancing reasons’.
Here are some alt data sets travel-focused companies may want to consider monitoring:
A good way to gauge the public’s desire to travel is by crawling social media for posts, and travel groups relating to travel. People may be discussing the best places to travel, where venues are open for business or sharing posts of their recent vacations. This information can help you understand if certain travel sentiments are on the rise, as well as tailoring deals to that sentiment. Many are looking for cheaper options which are less popular, and creating packages tailored to those current desires can put your travel business at the forefront of rebounding leisure travel.
Scanning online travel data
Everything from Online Travel Aggregators (OTAs), to monitoring crowd-sourced review sites like yelp, and TripAdvisor can help you see what people are interested in now, and how travel consumption trends are changing. Just as more people prefer private apartments over hotels, many people may prefer private on-site dining experiences over dining out at a fancy restaurant. Data will help you build a clearer post-pandemic traveler profile.
The bottom line
Inflation is back, and as things currently stand prices in the U.S. in particular but around the world in general, will continue to rise if current trends persist. But as much as businesses need to be prepared for such price hikes, and figure out creative ways to mitigate consumer shock, and a potential decrease in spending. Companies should also keep a close eye on non-traditional data sources which give them a market-first advantage, as well as deep insights into consumer behaviors, and desires so that they can ‘give people what they want’, and maintain, or even increase their market share.