This is a topic that I haven’t written about since I started my blog seven years ago because there hasn’t been a reason. We have just gone through a decade that benefitted from both low interest rates and low inflation – a rarity in historical economic terms.
Anybody building a broadband network can tell you they are seeing significant inflation in the prices of components needed to build a fiber network. There are some who shrug off current inflation as a temporary result of supply chain issues. To a large degree, they are right, but the inflation is real nonetheless. As someone who worked in the industry in past times of inflation, my experience is that prices never go back down to former levels. Even if all of the factors leading to current inflation are eventually solved, it’s unlikely that the companies that make conduits and handholes will ever go completely back to the old prices.
To some degree, the lack of inflation has spoiled us. As recently as a year ago, I knew that I could pull a business plan off the shelf from ten years ago, and it probably still made sense. All of the industry fundamentals from a decade ago were all roughly the same, and a business plan that worked then would still have worked.
I hate to say it, but those days of surety might be over for a while. The chart below is all-too-familiar to those of us who have been in the industry a long time. In the not-too-distant past, we saw periods of both high interest rates and high inflation. 1980 is not ancient history, and those of us who were in the industry at the time recall the jarring effect of both high interest rates and high inflation on telephone companies. This chart doesn’t go back to even worse times, like in 1970 when President Nixon ordered a nationwide freeze on wages and prices to try to stop hyperinflation. I remember seeing a talking head economist on a business show a few years ago who said that we now know how to beat inflation and that high inflation and high interest rates were never coming back to the U.S. economy. I had a good laugh because I knew this guy was a total idiot.
We now live in a global economy, and the U.S. doesn’t have any magic pill that somehow keeps us out of worldwide economic upheaval. As one example, West Africa is currently suffering from hyperinflation. The current inflation rate in Nigeria is 16%, down from over 20%. Nearby Congo is one of the primary sources for metals like cobalt and tantalum that are essential for making things like computer chips and cellphones. When the price of raw material from Congo skyrockets, the industries that use those resources have no choice but to raise prices to compensate.
We don’t have to go back to ancient history to remember when we worried about interest rates. I worked with cities that were floating municipal bonds in the 2000s, and I recall times when they delayed selling bonds hoping that rates would be more favorable in the weeks or months to follow. One fiber project I was working with never was launched because the cost of interest on bonds grew larger than the project could support.
Everybody who builds financial forecasts for broadband businesses is in a quandary. How do we reflect the rising costs for materials and labor? How can anybody forecast the cost to build fiber two years from now or three or five years? We look out over the next ten years and see an industry that wants to grow faster than the support structure for the industry is ready to handle. Companies like Corning have difficult decisions to make. The company could likely sell twice as much fiber as in recent years if it had more factories. But does it dare build those factories? A factory is a fifty-year investment, and does the company want to have huge idle capacity a decade from now when the fiber craze naturally slows down? Every manufacturer in the industry is having a similar conversation, but nobody knows the calculus for figuring out the right answer. And that calculus will get much harder if we see the return of both inflation and higher interest rates.
Interest rates are going to have to increase at some point. The rates have been held below the natural market as a monetary strategy to fuel the economy. But the Federal Reserve signaled a few weeks ago that it foresees six to seven interest rate increases over the next two years.
I don’t mean for this blog to be gloom and doom. For most of my career, I’ve dealt with both inflation and interest rates when making financial forecasts. The last decade spoiled me like it spoiled many of us, and we need to readjust the way we think about the future and figure out how to deal with an economic world that is returning to normal.