BREAKING NEWS Protests continue in downtown Lafayette, avoid the area Full Story
STREAMING NOW: Watch Now

Rising costs start to squeeze American businesses

Mysteriously low inflation padded Corporate America's bottom line for years. Now soaring commodity prices and steadil...

Posted: May 2, 2018 4:59 PM
Updated: May 2, 2018 4:59 PM

Mysteriously low inflation padded Corporate America's bottom line for years. Now soaring commodity prices and steadily rising wages threaten to ding record profits.

Major companies including Caterpillar, Halliburton and Harley-Davidson warned in recent weeks of rising costs for everything from steel and crude oil to trucking. President Trump's steel and aluminum tariffs are adding to the pricing headaches.

America's factories have been grappling with inflation this year. Prices for manufacturers have increased for five straight months to the highest since 2011, according to the Institute for Supply Management. Labor shortages and transportation delays are even making it harder for some factories to deliver their products on time.

"We expect steel and other commodity costs to be a headwind all year," Bradley Halverson, Caterpillar's chief financial officer, told analysts during a conference call last week.

Harley-Davidson warned that Trump's steel and aluminum tariffs could jack up its raw materials costs by $20 million this year.

"We have a highly volatile situation," John Olin, Harley-Davidson's chief financial officer, told analysts last week. "That's going to provide quite a headwind for the company over the next several quarters."

Although some inflation may be evidence of a healthy economy, prices could rise to levels that eat into corporate profits, which have been juiced by years of low expenses.

"Inflation is now beginning to show up in the operations of a lot of different businesses," said Peter Boockvar, chief investment officer at Bleakley Advisory Group.

"This is the biggest threat to profit margins of the cycle," Boockvar said.

Related: The recovery from the Great Recession hit a milestone

Evidence of stronger inflation could grab the attention of the Federal Reserve, forcing it to speed up interest rate hikes. Fed officials are expected to acknowledge in a statement on Wednesday that inflation is moving up.

The Fed's favorite barometer of annual inflation, the core personal consumption expenditures index, rose in March to 1.9%. While that's not alarming, it is the highest in over a year and just a hair shy of the Fed's target of 2%.

"There is a very real potential that signs of increased inflation will lead the Fed to accelerate normalization," said Kristina Hooper, global market strategist at Invesco.

Consider the rising number of companies citing "inflation" during earnings calls. The term came up in 99 earnings calls of S&P 500 companies between March 15 and April 30, according to FactSet. That's up from 77 during the same period last year, FactSet said.

The good news is that businesses have a sizable cushion to absorb inflation, thanks to all the money they're saving because of tax cuts. Companies can also offset rising commodity costs by raising prices on customers.

But it's not just commodities fueling the pricing pressure. Trucking costs have been on the rise for months amid a shortage of drivers. Oreo and Ritz maker Mondelez said this week that its profit margins were squeezed by both higher commodity costs and "freight inflation."

"Shortages of trucks and drivers has impacted delivery times," one executive from the food, beverage and tobacco products industry said in the ISM manufacturing survey.

Some industries are also starting to report evidence of rising wages because of worker shortages.

"The labor market is tight," Halliburton CEO Jeff Miller said last week. "Given the level of activity, there will likely be wage inflation and additional pricing will be necessary for cost recovery."

Related: The US dollar is making a huge comeback

Pay raises would be terrific news for Main Street, which has grappled with anemic wage hikes during much of the recovery from the Great Recession.

With the unemployment rate at a 17-year low, economists have been forecasting that companies will be forced to pay more to fill open positions.

Mark Zandi, chief economist at Moody's Analytics, predicted in a report on Wednesday that the US unemployment rate could soon drop into the 3% range. However, he called it "rarified and risky territory, as the economy threatens to overheat."

If the Fed sees signs of overheating, it may be forced to cool the economy off through aggressive rate hikes, which slow growth. The recovery from the Great Recession hit a milestone this week: It's tied for the second-longest economic expansion in American history.

Wage inflation could be seen as a negative for stocks. Paying more to workers threatens to dent corporate profit margins, which grew to record highs thanks in large part to low labor costs.

"What's good for corporate profits was not good for Main Street," Boockvar said. "Now, it's a benefit to Main Street, but at the cost of possibly squeezing earnings."

Wall Street is already on high alert for signs of inflation that could force the Fed to act. Stocks began a months-long period of turbulence in early February after investors learned that wages increased in January at the fastest pace since 2009.

"That shocked markets," Hooper said.

Indiana Coronavirus Cases

Data is updated nightly.

Confirmed Cases: 34574

Reported Deaths: 2134
CountyConfirmedDeaths
Marion9853578
Lake3616190
Allen161869
Cass15877
Elkhart132228
St. Joseph127434
Hendricks116971
Hamilton115993
Johnson1105108
Madison58659
Porter53928
Bartholomew51135
Clark50441
LaPorte43323
Howard40828
Tippecanoe4023
Jackson3891
Delaware38537
Shelby37322
Hancock33827
Floyd31839
Boone31535
Morgan27724
Vanderburgh2742
Montgomery24117
White2358
Noble23221
Clinton2321
Decatur22431
Grant21122
Dubois1993
Harrison19422
Henry18211
Greene16924
Vigo1698
Dearborn16821
Monroe16612
Warrick16628
Lawrence16324
Miami1401
Putnam1377
Kosciusko1351
Jennings1304
Orange12822
Scott1203
Franklin1108
Ripley1096
Marshall1082
Carroll932
Daviess8816
Steuben832
Wayne825
LaGrange812
Wabash782
Newton7810
Fayette777
Jasper671
Washington521
Jay520
Clay511
Fulton491
Rush472
Randolph473
Pulaski460
Jefferson451
Whitley423
Starke393
DeKalb371
Sullivan361
Owen351
Brown331
Perry330
Wells320
Benton300
Huntington282
Knox280
Tipton251
Blackford252
Crawford240
Fountain212
Switzerland200
Spencer201
Parke180
Gibson172
Posey160
Adams151
Ohio130
Warren121
Martin110
Vermillion100
Union90
Pike60
Unassigned0167
West Lafayette
Clear
73° wxIcon
Hi: 75° Lo: 65°
Feels Like: 73°
Kokomo
Few Clouds
67° wxIcon
Hi: 73° Lo: 62°
Feels Like: 67°
Rensselaer
Clear
68° wxIcon
Hi: 74° Lo: 64°
Feels Like: 68°
Fowler
Clear
68° wxIcon
Hi: 74° Lo: 64°
Feels Like: 68°
Williamsport
Clear
71° wxIcon
Hi: 76° Lo: 64°
Feels Like: 71°
Crawfordsville
Clear
66° wxIcon
Hi: 74° Lo: 63°
Feels Like: 66°
Frankfort
Broken Clouds
69° wxIcon
Hi: 74° Lo: 63°
Feels Like: 69°
Delphi
Clear
68° wxIcon
Hi: 74° Lo: 64°
Feels Like: 68°
Monticello
Clear
68° wxIcon
Hi: 73° Lo: 63°
Feels Like: 68°
Logansport
Clear
66° wxIcon
Hi: 74° Lo: 62°
Feels Like: 66°
Hot, humid weather with severe weather risk.
WLFI Radar
WLFI Temps
WLFI Planner

COVID-19 Important links and resources

As the spread of COVID-19, or as it's more commonly known as the coronavirus continues, this page will serve as your one-stop for the resources you need to stay informed and to keep you and your family safe. CLICK HERE

Closings related to the prevention of the COVID-19 can be found on our Closings page.

Community Events