Corporate Inflation Hits All-Time High - InvestingChannel

Corporate Inflation Hits All-Time High

Proprietary Data Insights

Financial Pros Top Cash Cows Stock Searches This Month


Psychology of Inflation

When inflation and deflation run away, it creates its own psychology that builds on itself.

With inflation, consumers purchase now to avoid higher prices in the future.

With deflation, consumers hold off on purchases as they know prices will drop.

Taken too far in either direction, you get a situation where people hoard products (inflation) or refuse to buy anything (deflation).

We’ve started to see aspects of the first scenario as consumers and companies buy well in advance to ensure they receive products.

That’s led to demand outstripping supply, pushing prices even higher.

As we point out in our main story, inflation for producers hit the highest levels on record.

All this points to clear reasons for the Fed to speed up its taper and increase rates faster.


Corporate Inflation Hits All-Time High

Key Takeaways

  • The producer price index (PPI) jumped 9.6% YOY vs estimates of 9.2% and 0.8% compared to November setting a new record.
  • Excluding food, energy, and trade services (core PPI) prices rose 0.7% for the month and 6.9% for the year vs estimates of 0.4% and 7.2% respectively.
  • Demand for goods rose 1.2%, 0.1% below last month’s 1.3% reading.

Stocks tumbled as manufacturer inflation data came in hotter than expected, exacerbating worries about corporate earnings.

Input Costs Rise

Producer costs break down further into processed and unprocessed goods for intermediate demand, which then breaks down into various commodities.

Analysts worry about heavy YOY toll from processed and unprocessed goods for intermediate demand climbing +25% +50% respectively almost every month.

While the price of goods for final demand remains more subdued, as the costs are a combination of labor and goods, these current readings suggest no end in sight for consumer inflation.

Services didn’t fare as badly but still managed to post numbers just shy of 10%.

It’s a bit surprising that we didn’t see the cost of transportation and warehousing rise more. However, 0.7% isn’t small either.

Earnings Outlook

Companies have already begun to plan increasing manufacturing capacity closer to customers. We can assume they will hold larger inventories going forward as well.

While CAPEX won’t hurt EPS immediately, it will increase depreciation and amortization costs down the road.

But with interest rates expected to rise, it’s smarter to invest in automation and capacity now than a year from now.

The Bottom Line: Although Consumer Staples (XLP) saw a nice run lately, higher PPI means more input cost pressure for them compared to tech companies.

That means companies like Kellogg (K), General Mills (GIS), and Kraft-Heinz (KHC) will struggle to maintain margins which could send shares lower at their next earnings reports.

Right now, we’re more interested in service companies that rely more on intelligent labor and research and development that generate positive cash flows and earnings now. Companies like Visa (V), (CRM), and Akamai (AKAM).

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