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Inflation Eats Corporate Profits

Years of slow inflation have been good for American companies. But, this is changing as inflation picks up. The price of oil has risen from as low as $30-40 to $75 per barrel. The late 2016 OPEC agreement masterminded by Saudi Arabia is paying off. Meanwhile, personal consumption expenditures rose nearly 2 percent in March, CNN Money reports. This is happening as the weaker dollar is making imports more expensive.

This, in turn, is likely to lead the Federal Reserve Bank (the Fed) to continue to increase interest rates, making business financing costs higher, and so cutting into profits even more. On the other hand, businesses are getting tax cuts, which gives them some cushion.

The rise of commodity prices is certainly adding to inflation. But, there are other factors. The shortage of track drivers is leading to increases in transportation charges. And some other industries are experiencing rising costs because of low unemployment rate and resulting worker shortage.

“The labor market is tight. Given the level of activity, there will likely be wage inflation and additional pricing will be necessary for cost recovery,” claimed Jeff Miller, CEO of Halliburton.

However, low unemployment is a big plus for the public. For years following the Great Recession, which began in 2008, the wages haven’t been growing. Now, it is quite likely that wage growth will pick up. But this will further eat into corporate profits.

If inflation picks up more than expected, the Fed may initiate a series of interest rate hikes, which can then lead to economic slowdown if not another recession.

If the trade war between the United States and China intensifies, this would be bad for workers in both countries. Steep tariffs would also increase prices of goods, potentially leading to stagflation, which is high inflation combined with high unemployment. America hasn’t seen stagflation since Jimmy Carter’s era.

At present, the American economy is doing well, corporate taxes got lower, and unemployment is at a 17-year low. But, this rosy picture may not last for long if interest rates rise, oil continues to climb, and the U.S.-China trade war intensifies.