Inflation is everywhere, including places you might not expect

It’s adding to legal costs for the maker of Marlboro cigarettes, driving up bills for auto repairs at Allstate Corp., prompting people to pay less on their credit card balances, and at social-media companies. Increasing concerns about reducing advertising spend.

While companies have been sounding the alarm over inflation for the past year, economists were mostly touting rising prices as a temporary disruption due to the reopening of the economy. Instead, inflation has remained and recently reached its highest rate in four decades, prompting the Federal Reserve to accelerate its plan to raise interest rates.

To maintain profits, companies are passing more price hikes to customers as inflation shows no signs of slowing down.

“It’s a kind of cascade from what was initially a small set of goods to a very large set,” said Chester Spat, chief economist at the Securities and Exchange Commission from 2004 to 2007 and now a professor of finance at Carnegie Mellon University. ,

He said rising prices are not the main problem of inflation; It is that prices are moving by different amounts at different times. As some prices move higher than others, companies and consumers can change their spending plans, something that can affect the entire economy.

“It would be a cause for some concern if all prices were to rise by the same amount, but it would be neutral,” Mr Spat said. “Inflation is also an indication that there is a lot of relative variability in pricing.”

Car and home insurer Allstate cited inflation, particularly rising used car prices, for the increased cost of auto-accident claims. Used-car value began to climb in late 2020 and rise 68% in 2021, Allstate said when it reported earnings this month. Higher prices are reflected in the total number of insurer payments for vehicles.

In the first half of 2021, Allstate’s profit from auto-insurance underwriting was more than $1.7 billion as the decline in accident frequency offset the increasing severity of claims. The number of accidents rose toward pre-pandemic levels in the second half of the year, and claims costs continued to rise, resulting in more than $450 million in underwriting losses in the period.

Glen Shapiro, president of Allstate’s asset-liability business, said the supply-chain problems and chip shortages that are driving up prices are not expected to clear up this year. Meanwhile, the increase in the prices of used cars should calm down in the future quarters, he said. Prices for used cars rose 40.5% in January from a year earlier, according to data released Thursday by the Labor Department.

“There’s likely some sort of structural maximum that used-car prices go,” Mr. Shapiro said on the company’s earnings call. “They probably won’t exceed the prices of new cars.”

Allstate began raising auto rates in the second half of 2021. This is a reversal from earlier in the pandemic when it was sending refunds to customers as Americans were locked in homes in 2020.

A Wall Street Journal analysis of 280 companies that reported quarterly earnings on February 4 showed that 79% had some discussion of inflation in their conference calls.

For some companies, the increased cost is contractual. Marlboro cigarette maker Altria Group Inc expects inflation to increase the amount it will pay from the historic 1998 tobacco settlement, it said last month. The settlement affects cigarette manufacturers with legal liabilities that cost them $200 billion over the years.

Annual payments under settlement are determined using several components, including inflation adjustments that exceed 3% a year or so in government inflation data published in January, according to Altria’s regulatory filing. The Labor Department reported Thursday that the consumer-price index rose in January to a 7.5% annual rate.

Among social-media companies, Twitter Inc. and Facebook parent Meta Platforms Inc. Downplayed the impact of inflation on its operations, but also warned that rising costs affecting other businesses—such as freight, materials and wages—could curb advertiser spending.

“We’re hearing from advertisers that macroeconomic challenges such as cost inflation and supply-chain disruptions are impacting advertisers’ budgets,” David Weiner, Meta’s chief financial officer, said on a conference call this month.

Twitter’s CFO Ned Segal said inflation could affect the company in a few different ways, including higher wages and brands shifting the goods and services they choose to advertise. “We are yet to see a real impact from inflation on how our advertising and content partners look on Twitter,” said Mr. Sehgal.

Some financial-services firms said the steep rise in the prices consumers pay for items such as food, gas and furniture could develop into cautious spending.

Credit-card issuer Synchrony Financial said the percentage of customers making payments to cover their entire balance or more has decreased slightly, with an increasing share of minimum payments being made or lower.

The company said spending picked up in the second half of 2021 and the payout rate, or the amount people pay against their balances, began falling from historically high levels. The company also pointed to the end of government assistance to consumers.

“Higher consumer spending, lower consumer savings, inflationary pressures and a return to full fiscal obligations have begun to impact savings levels accumulated by consumers, which we believe will lead to a moderation in the payout rate,” said Synchronous CFO Brian Wenzel said at a January conference call.

Payments company PayPal Holdings Inc said the impact of inflation on individual consumption, as well as labor shortages, supply-chain issues and weak consumer sentiment, have prompted it to take a more cautious approach.

“Our medium-term targets did not simply consider inflation and supply-chain issues at 40-year highs,” CFO John Rainey said on a conference call this month.