Industry Bosses See Price Hikes as Shortages Hamper Rebound

(Bloomberg) -- European companies are pushing up prices as supply disruptions lift costs and hamper their ability to match surging demand, according to executives gathered for a conference this weekend in southern France.

The bosses of industrial firms, including tire company Michelin and construction materials producer Saint-Gobain, say they're facing scarce supplies, transport bottlenecks and staff shortages in the wake of the pandemic, and they expect consumer-price inflation to pick up as a result.

“We usually have one or two operational crises to handle at a time on supplies -- right now we have 23,” Michelin Chief Executive Officer Florent Menegaux told Bloomberg TV. “The entire supply chain has been disturbed.”

The concerns raised at the annual Aix-en-Provence conference highlight the uncertainty surrounding Europe's rebound from the deepest peacetime recession in a century.

Shops, restaurants and leisure facilities are finally reopening as vaccinations gain pace across Europe, but uneven progress in combating the coronavirus around the world has left supply chains damaged and workers hard to find.

European Central Bank President Christine Lagarde, who attended the conference, told France Inter radio that while the euro-region economy is “clearly in a period of recovery” and may reach its pre-pandemic size sooner than expected, current price pressures are “mostly transitory.”

Still, ECB Executive Board member Isabel Schnabel noted upside risks to inflation in a speech in Germany on Saturday -- though she said that may be necessary to escape from years of weak prices and low growth. Dutch central bank President Klaas Knot said he worries that policy makers may be underestimating the risk of too-high inflation becoming entrenched.

Measuring Inflation

Speaking on Sunday at the conference, Bank of France Governor Francois Villeroy de Galhau raised another difficulty with inflation: measuring it. He noted that while changes in prices are often overestimated by households, the ECB hasn't taken into account the pressure from housing costs.

“Better accounting for housing costs is very important,” Villeroy said. “It's one of the things that we must change in the strategic review of monetary policy that we are in the process of concluding.”

Read more: ECB's Schnabel Says Temporary Inflation Overshoot ‘Necessary'

Pricing and shipping delays also bear close monitoring, according to French Industry Minister Agnes Pannier-Runacher. “We have some factories that have to slow down their production, they have a huge backlog, but they don't have the parts to produce,” she said in a Bloomberg TV interview.

Michelin has raised tire prices twice since the start of the year, Menegaux said, noting that the cost of shipping containers between Singapore and the U.S. has jumped to about $9,800 currently from $2,400 in 2019. “In the end, customers will pay,” he said.

Air Liquide SA Chief Executive Officer Benoit Potier said the bottlenecks will take as long as two years to work themselves out.

Staff and Materials

“This goes much deeper than just pent-up demand,” said Saint-Gobain Chief Executive Officer Benoit Bazin. He's had to make quick changes to supply chains to keep factories operating, at one point importing from Indonesia a product that was temporarily unavailable near a plant in Texas.

“It was expensive, but we couldn't do it otherwise and this is creating inflation,” he said. “The big issue this year is availability, both of staff and raw materials.”

Demand is also being sustained by government stimulus plans, including the European Union's 800 billion-euro ($949 billion) recovery fund, which is focused on making the post-pandemic economy greener and more digitized.

The French government is pouring incentives into renovating buildings to make them more energy efficient. Bazin said it takes six to nine months to book builders in France now, and that the situation will likely be prolonged as Europe's climate goals lead to a doubling in the rate of renovations this decade.

Some companies fear they'll suffer even more as they struggle to pass higher costs onto customers.

Orange SA Chief Executive Officer Stephane Richard told Bloomberg News on the sidelines of the conference that tight competition in telecoms means it has to absorb cost increases.

“Inflation to us is yet another constraint that pushes us to be more productive, to reduce our costs,” he said. “Inflation isn't good news for the telecommunications sector.”

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