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This past Friday the markets were closed for Good Friday. I spent much of the day catching up on my reading. I have come to the conclusion that is there is a worrying theme that I do not think it priced into the market yet. It is the obvious return of inflation. Given that profit margins are close to record highs for the S&P, I think inflation’s impact to these margins will result in lower operating profits than expected and this risk is not priced into the market.

Here are 5 items that caught my eye just from today’s New York Times business section looking at the earnings reports released Thursday.

  1. Airlines have experienced a 50% rise in jet fuel prices since last year. Energy prices now make up 40% of airline’s operating costs, up from 30% last year. Southwest (NYSE:LUV) is one of the few carriers reporting a profit in the first quarter, despite rising ticket prices
  2. Dupont (NYSE:DD) successfully raised average product prices by 8% in the first quarter for performance chemicals. Since these products are inputs to numerous manufacturing goods, margins for those companies will be reduced unless they can raise their prices by like amounts
  3. McDonald’s (NYSE:MCD) reported that it expects food prices to rise between 4 to 4.5 percent in Europe and the United States. It does not expect to be able to pass all of those price increases on to its customers.
  4. Xerox (NYSE:XRX) reports it is having to make alternate plans for some of its core supplies, due to the tragedy in Japan, and expects increased supply chain costs going forward.
  5. And of course, from the New York Times (NYSE:NYT) earnings report itself; newsprint costs rose 12.7%.

It will be interesting as we go through the rest or earnings season whether this theme accelerates, gains more visibility and starts to impact expectations going forward. Rising inflation is just one of many reasons I remain cautious on the market going into the summer months. Be careful out there.

Source: Return of Inflation: 5 Worrying Signs From Friday's NY Times