Inflation: Hiding in Plain Sight?

What are Rosin and Scrap Metal Telling Us About Future Margins?

Heartland Advisors value investing market insight raw industrials char

Source: Bloomberg L.P., 4/14/2015 to 4/25/2016
Raw industrials are represented by the Commodities Research Bureau BLS US Spot Index Raw Industrials Subdivision.
Past performance does not guarantee future results.


Those skeptical about whether inflation is on the rise need to look no further than the Commodity Index chart above to see that things are heating up. After bottoming in November, prices of commodities from scrap steel to rosin have been climbing. The upturn suggests demand growth and supply constraints are at work, which is welcomed news for many sectors. Adding to the potential of greater inflation is an uptick in wage pressure as measured by the Bureau of Labor Statistics during the past several months.

If the trend continues, businesses where the bulk of expenses are tied to fixed costs could benefit as overhead should increase at a slower pace than the prices charged to customers. This dynamic tends to boost cyclical areas such as Energy, Materials, Industrials, and asset sensitive Financials—groups that have been hard hit in recent years and are trading at depressed valuations as a result.

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Author

Heartland Advisors Value Investing Research Analyst Andrew Fleming

Andrew J. Fleming

Fleming, CFA, is Vice President and Portfolio Manager of the Value Plus Fund and its corresponding separately managed account strategy. He has 7 years of industry experience, 4 at Heartland.

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