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High energy prices slosh through the economy

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The latest government inflation figures show that prices are rising r -idly and that much of the momentum is coming from energy. The trends are already affecting companies in several industries and will continue to run through the economy. Investors should watch out for falling margins – and possibly under pressure on valuations – in the months ahead.

On Tuesday, the Bureau of Labor Statistics published the monthly producer price index, which measures the prices of goods and services as they move through the supply chain. The report showed that the PPI rose 0.6% m / m in October and 8.6% year-over-year, in line with economists’ expectations.

The consumer price index, which measures prices at the retail level, is due to be released on Wednesday. This report is likely to show that rising energy prices are forcing consumers to pay for heating oil, propane, gasoline and other fuels.

“I think consumers are sure to be in even more pain this winter,” said Marcus McGregor, energy analyst with wealth manager Conning. “I think if you look at the latest reports, the cost of propane, natural gas and all the sources that lead into the consumer’s home – if we have a really cold winter – are likely to go up significantly this winter. So I see more pain with relief when it comes to the US consumer. “

Companies already have to ad -t. The PPI shows how escalating energy costs are affecting businesses – and how they can ultimately flow to consumers in multiple industries. The price of goods in the final production phase (as opposed to components) rose 1.2% for the month, with three-quarters of that increase being attributable to an increase in energy prices, according to the report. In October, oil prices rose 13%. Natural gas prices were flat in October after rising 34% in September, their largest one-month gain in 12 years.

This has been a boon to the energy companies who have led the market up this year after lagging for much of the previous decade.

Exxon Mobil

(Ticker: XOM) The stock is up 58% this year, and

BP

(BP) is up 34%.

However, rising energy prices are attracting several other industries. Consumer goods are becoming more expensive because they are more expensive to ship to warehouses and stores.

“Greater impact on raw material and freight costs combined hurt gross margins by 400 basis points,” said

Procter & Gamble

(PG) CFO Andre Schulten on the company’s conference call last month.

Airlines are also pinched because fuel can account for around a fifth of their spending.

Delta Airlines

For example, (DAL) said on its recent conference call that high fuel prices will “put pressure on our ability to remain profitable in the December quarter”.

“We are currently expecting a modest fourth quarter loss, with crude oil prices up nearly 60% year-to-date and more than 15% last month,” said CEO Ed Bastian.

Companies that manufacture or process fuels and chemicals often run on natural gas. Refineries

Valero energy

(VLO) said the refinery’s operating costs rose 6% in the third quarter, largely due to higher natural gas prices. And any other business – including office work – that uses significant amounts of electricity can be adversely affected by rising energy prices. Natural gas now accounts for the largest share of US electricity generation.

Industrial companies can also be affected as their operating costs increase. Processed fuels used in manufacturing – things like oils, fats, natural gas, and diesel – are on average 34% more expensive than they were a year ago, according to the PPI. This, along with supply chain problems around the world, is causing some industrial companies to warn investors that their margins could be affected.

German chemical company

BASF

(BASFY) said high natural gas prices cost € 600 million in the first nine months of the year, but price increases in October would make operations even more expensive.

“Across practically all value chains, our suppliers, our customers and we ourselves are still confronted with rising raw material, energy and transport costs, supply chain restrictions and the associated and largely unpredictable problems of material availability,” said CEO Martin Brudermüller at the company’s last conference call .

It is a global problem that is not going to go away anytime soon and that consumers are starting to feel too.

Write to Avi Salzman at [email protected]

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