Profit Margins

The Lehmann Letter (SM)

Yesterday's letter said that rising commodity prices and inflation overseas would not boost inflation in the US. That's because domestic borrowing, spending and demand remain weak.

But rising commodity prices could nonetheless squeeze American firms' profit margins. US businesses must compete in product markets even if - or especially if - demand for their output is weak. At the same time they must purchase inputs on the open market as the cost of those inputs rises. That means American corporations’ profit margins will be squeezed by the rising prices they must pay for materials and the weak prices they receive for their products.

If domestic producers can't pass higher costs on to their customers, they'll be in the worst of both worlds. But that doesn't necessarily mean that we'll have rising inflation here at home.

© 2010 Michael B. Lehmann