Inflation to deliver a double whammy to corporate profits in 2011

British consumers are in uproar at eight per cent grocery bill rises from the start of January, delivered under the guise of the government’s VAT increase. But it is the same story all over the world as New Year list prices go up to reflect the surging cost of raw materials.

Not all of this increase will be past on, because of the impact on sales. Corporate profit whammy one. Then again what is past on to consumers is going to dent sales revenue. Corporate profit whammy two.

Spotting the 600lb gorilla

It is astonishing that Wall Street analysts seem to have largely missed this 600lb gorilla in the elevator. Perhaps they will notice it in the 7/11 store on the way home one night.

Commentators like ShadowStats.com have been pointing out that consumer price inflation figures are a nonsense for ages. The government just keeps cutting out items that are going up, like petrol. But this farce can only be kept running for so long. Increasingly inflation is going to become painfully apparent.

How can it be anything else with oil approaching $100 a barrel again? Or look at the record price of copper and silver, key industrial commodities. Or the huge hike in the cost of cotton and agricultural products across the board.

There is always a time lag. Producers are reluctant to raise prices in a tough market. There are old stocks of raw materials to be used up first. But eventually manufacturers pay more for commodities and just have to pass that higher cost on to consumers.

Double whammy

That is not so easy in a bad market, so profit margins get hit from whammy one, higher raw material prices, and then comes whammy two, the impact of higher retail prices on consumer demand.

This inflation is the unfortunate side-effect and consequence of the massive bailouts and super-low interest rates used to combat the global financial crisis of two years ago. Anybody who thought this could be achieved painlessly lives on a cloud of their own in another universe.

Younger analysts can be forgiven their ignorance, naivety and stupidity. Older heads on Wall Street have been running yet another giant scam, pulling the plankton back into the mouth of the whale. But that beast could now be heading for some serious indigestion.