Two articles last week discussed recent corporate conference calls on earnings and quarterly profits. Both articles noted how corporations were providing guidance on how future profits could be impacted by rising costs of materials used in production caused by inflation. These commodity and raw material costs could cause significant “headwind” for producer profits. Some producers will be able to flow those costs forward to the consumer, but others will be challenged by the business environment.
Another article discussed the leverage that companies like Amazon and Walmart have in pricing products. It specifically noted grocery stores and consumer-product companies as losing leverage to flow inflationary affect through to the consumer. Companies that have to absorb these inflationary effects will end up showing that on the bottom line, which will hurt profits, stock prices, and shareholders.
In addition, the Personal Consumption Expenditures (PCE) Index, an inflation barometer the Federal Reserve uses in its GDP calculations, hit the Fed’s target of 2% in April. This event is expected to cause the Fed to take a more aggressive stance on inflation and will probably imply more frequent interest rate hikes.
The question I have is, will the Fed’s new hawkish stance on inflation be enough to preclude long term inflationary effects to take hold?