Alcoa (AA) Reports Earnings: Margins Squeezed by Inflationary Pressures
July 12, 2011 11:48 am
One thing we have discussed time and time again is the lack of responsibility on the side of the Federal Reserve. They have left rates inherently low and created an environment for inflation to become contagious. As Alcoa (AA) reported earnings last night, we couldn’t help but read through the issues that they are currently facing and why they were lowering guidance. The prices of raw goods and creation of finished goods eating into margins was the major topic at hand. Producer Prices will be released on Thursday of this week and if the trend should continue higher, further inflation pressures will be put on Corporate America and ultimately passed down to the consumer.
As you can see in the chart above, Producer Prices when excluding the all important Food & Energy have been fairly tame at around 2% on a year over year basis. Unfortunately Food & Energy are where most companies spend most of their money on creating goods. To produce steel, Alumni and other metal products, Alcoa utilizes lots of energy in order to melt down the raw goods and produce a finished product. Commodity prices specifically in the energy sector have come down off of their highs as we have seen tactics from the government such as releasing Strategic Petroleum Reserves and a strengthening of the dollar against the Euro. However, longer term inflation will not be kept at bay with the serious amounts of liquidity currently held up in the market place.