Rising inflation has decreased profit margins of US companies due to rising costs and they are passing them along to consumers in the form of higher prices.
The US is in a very interesting position right now. Unemployment is at its lowest in decades, economic growth is still strong, and the Fed is currently raising interest rates. Inflation rates are near the Fed's 2% target, but prices could continue to increase if the economy experiences labor shortages and if tariffs continue to intensify. Investors are worried however that the Fed might raise interest rates more quickly if inflation picks up to prevent the economy from overheating. However, a strong dollar could potentially offset this pressure, as a stronger US currency makes imports cheaper.
Food giants like Hershey (NYSE: HSY) and Nestle (SWX: NESN) have announced that they will increase prices in 2019. Coca-Cola (NYSE: KO) has already increased prices, which has helped them beat revenue projections in the third quarter. The wide range of products goods and services that are affected include: Hershey's chocolate, Oreo cookies, Wheat Thins, Triscuits, Coca-Cola, fluffy Eggo waffles, Nestle bottled water, Ritz crackers, Sherwin-Williams paint, cat litter, airline fares and fees from companies like Delta, Jetblue, and American, and fast food, to name a few. These companies are passing on to customers higher costs for fuel, metal, and food.
Mondelez (NASDAQ: MDLZ) shares rose 2% after it reported stronger profit margins in the third quarter despite an increase in costs and tempered sales growth in the US. Mondelez has said that Oreo cookies, Ritz crackers, and other treats boosted revenue especially in emerging markets, which have been growing faster than other US company sales in the same markets. Emerging markets made up 37% of revenue for Mondelez.
The company raised prices on some US-focused brands during the summer months such as Fig Newtons, Wheat Thins, and Triscuits. It kept prices of Oreos the same because the brand is popular around the world. The company is planning its next round of prices increases to take effect at the start of 2019 with straight hikes, adjustment to promotional deals, and smaller package sizes. The company has tried to move towards more natural foods in the US by buying brands that offer healthier and gluten-free alternatives such as their purchase of Tate's Bake Shop cookies last year. Mr. Van de Put, CEO, has stated a goal to boost the company's adjusted operating profit margin to 17% this year, from 16.3% in 2017.
US manufacturers are paying approximately 8% more for aluminum and 38% more for steel than a year ago as a result of tariff. Additionally, a 10% tariff the administration imposed in September on $200 billion worth of various goods from China is also increasing costs for businesses that buy those imports. However, consumer sentiment is strong and they are getting used to higher prices and thus some companies are also charging more to improve profits. For instance, Apple recently increased prices on the new MacBook Air and iPad Pro by 20% and 25% respectively. This pickup in inflation is a result of a strengthening economy and so both businesses and consumers are learning to adapt.