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Inflation Isn’t Retail’s Only Risk This Year: Week Ahead

Retailers could face an uphill battle this year, and inflation is just one of their problems.

Legendary economic prognosticator Byron Wien believes inflation will color the year ahead and the Federal Reserve could raise interest rates four times before 2022 comes to a close. Wien, vice chairman of Blackstone Advisory Partners and former chief U.S. investment strategist for Morgan Stanley, also called out the potential for rising gold prices and crude oil prices topping $100 per barrel as developments to watch for on the Top 10 list he publishes annually with Blackstone chief investment strategist Joe Zidle.

CEOs around the globe are worried about inflation, according to The Conference Board’s C-Suite Outlook 2022 report. Bank of America Securities’ global economist Ethan S. Harris speculated that the Fed could hike rates six times this year, especially if inflation continues rising.

Rate hikes will eventually nudge mortgage rates higher, potentially putting a damper on spending beyond basics like food, housing and transport.

UBS analyst Jay Sole expects minimal softlines earnings growth this year, forecasting a 1 percent improvement on tepid sales growth and pressured margins. He’s of the opinion that retail promotions will coming roaring back this year, reversing companies’ margin gains. Proprietary UBS apparel spending data indicates waning consumer softgoods demand in recent months, with inflation the most likely culprit, Sole said. He’s bullish on Nike, Levi’s, American Eagle Outfitters, Ralph Lauren and Capri, while Nordstrom, Macy’s, Kohl’s and Dillard’s get dinged for their “low-growth potential” and likelihood of missing earnings estimates.

Michael Kors brand and Burberry have raised prices without consumer pushback, helping both firms mitigate rising supply chain costs. Inflation, however, could cause shoppers to think twice about what they’re willing to pay.

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Retailers will be keeping an eye on the recent surge in crime like northern California’s flash-mob robberies, with the state’s zero-bail policy perhaps emboldening shoplifters.

Union Pacific Railroad is also dealing with a 356 percent surge in retail product rail theft, assaults and armed robberies affecting the Los Angeles County area. Existing service in the region would further strain already taxed supply chains.

Meanwhile, FedEx filed a request under the Federal Aviation Act to equip some Airbus cargo jets with missile-defense systems after a similar 2019 filing never took off. The technology protects against heat-seeking missiles like the one that hit a DHL cargo jet in 2003 shortly after take-off in Baghdad.

In addition to the problem with not getting merchandise to arrive on time, retailers also bear the risk that items shipped to consumers may not get delivered. When that happens, it will reship the order to the consumer and then work out the details of settlement with the shipper. In the case of looting, retailers look to their insurance policies for reimbursement of damages, according to an executive at a San Francisco start-up. But filing a number of claims also runs the risk of premiums rising or getting dropped by the carrier. Protecting stores and staff with enhanced security is now simply the cost of doing business.

Off-price chain Century 21 learned the insurance lesson the hard way when it filed for bankruptcy in September 2020 after insurance providers refused to pay $175 million to cover Covid-19 losses.