There has been a lot of talk about the impact of rising energy prices on corporate profit margins. This is over-rated.
Corporate costs in America are much more heavily weighted toward labor. And it is labor cost inflation that hurts corporate profit margins most. Corporate costs are, on average, 70% labor, 5% commodities, and 3% energy. Energy and commodity prices could continue to rise – even double from here – without changing the cost structure of American businesses in a drastic way. The same dynamic is not true in many other countries, including emerging markets, where labor costs represent a smaller proportion of corporate costs. As energy and commodity prices rise, those companies may encounter much more pressure on their profit margins.
So what’s the bottom line? Energy and commodities can continue to rally without significantly damaging corporate profit margins. Furthermore, rising energy and commodity prices will give a relative advantage to the most efficient producers.