Investors typically seek to build portfolios that focus on companies with pricing power. Without that, as costs increase, margins can be squeezed. Currently, we seem to be in a period of rising costs, particularly for labor and certain commodities. Companies are likely to look first to productivity gains and raw material substitution, but, sooner or later, the ability to raise prices is crucial to maintaining margins.
Rising prices are likely to contribute to an increase in the rate of inflation, further aggravating the cost of goods sold problem.
Currently it appears that the Federal Reserve Board (the Fed) is expecting that the recent surge in labor costs and supply chain issues are likely to abate soon. Perhaps, but investors should remain alert. Inflation can be a self-fueled problem, as rising costs force price increases, which result in more cost increases and new price increases, ad infinitum.
All comments and suggestions are welcome. Walter J. Kirchberger, CFA