All eyes are centered this weekend on what is going on in Egypt, and the personal involvement in the streets adds to the present, critical nature of the transition taking place within the part of the world that would otherwise be geographically in the far distance. The intensity of the situation, which we will focus tomorrow in a post here as well as during the Sunday night interview on BFM radio, it is only natural to overlook some of the more ordinary news coming out during this earnings season, news that may have equally important implications for the future. In particular, we are now seeing the beginnings of inverse stagflation take hold in the form of creeping inflation. And the ramifications may go well beyond individual companies or industries.
Inflation will not be overwhelming for the United States this year. We expect our inflation to reach 2 % this year, as compared to (or vs.) the 1.5 % for 2010. However, individual companies will be more severely affected by inflation experienced be specific commodities.
This past week, we saw the impact across a broad range of individual companies and sectors:
- Coach Inc. (COH) with the rising cost of leather
- Kimberly-Clark (KMB) with the cost of specialty paper
- Sherwin-Williams (SHW) with the cost of paint
- Starbucks (SBUX) with the cost of coffee
- U.S. Steel (X) with the cost of coal and scrap metal
For these companies, future strategy will have to involve hedging their future purchases. This will differ from a company like VMware (VMW), one of the darlings of cloud computing whose flat margins may result from a more constructive investment in hiring and building new capabilities across geographic and product lines (as mentioned in Tuesday’s edition 0f Investors Business Daily).
The most interesting impact of this beginning inflationary cycle, however, may not have anything to do with Coach Inc.’s bottom line however. In one of the earliest reactions to this challenge, Coach said it is moving some production from China, where inflation is already hitting the cost of labor, to other countries with less perceived inflationary pressure such as Vietnam and India.
Individual companies’ shorter term strategies to address the inflation side of inverse stagflation may have longer term positive benefits to countries with relatively less inflation that will only become more watched with the passage of time.