High energy prices ripple through the economy

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Latest government Inflation figures They show that prices are rising quickly, and that most of the momentum is coming from energy. directions already hit business in many industries and will continue to ripple through the economy. Investors should watch for profit margins shrinking – and possibly pressure on valuations – in the coming months.

On Tuesday, the Bureau of Labor Statistics released the monthly Producer Price Index, which measures the prices of goods and services as they make their way through the supply chain. The report showed that the producer price index rose 0.6% in October on a monthly basis, and 8.6% on an annual basis, 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 more pain will definitely come to the consumer this winter,” said Marcus McGregor, energy analyst at Koning Asset Management. “I think if you look at the latest reports, the costs of propane, natural gas, and any sources that lead into the consumer’s home are expected to – if we have a really cold winter – increase significantly this winter. So I see more pain before comfort when it comes to the American consumer.”

Companies already have to adapt. The Producer Price Index shows how rising energy costs are affecting businesses – and how they can end up trickling down to consumers in many industries. The price of goods that were in the final stage of production (as opposed to component parts) rose 1.2% in the month, with three-quarters of that jump linked to higher energy prices, according to the report. In October, oil prices rose 13%. Natural gas prices stabilized in October, after jumping 34% in September, the largest single-month increase in 12 years.

This has been a boon for energy companies, which have led the market higher this year after being late for most of the previous decade.

ExxonMobil

(Stock ticker: XOM) is up 58% this year, and

BP

(BP) rose 34%.

But rising energy prices are a magnet for many other industries. Consumer goods become more expensive because it costs more to transport them to warehouses and stores.

“The combined effect of higher commodity and freight costs was 400 basis points on gross margins,” he said.

Procter & Gamble Company

(PG) Chief Financial Officer Andrei Schulten on the company’s earnings call last month.

Airlines are under scrutiny, too, because fuel can account for about a fifth of their expenses.

Delta Airlines

(DAL), for example, said in its last earnings call that higher fuel prices “will put pressure on our ability to continue to be profitable in the December quarter.”

“Currently, we expect a modest loss in the fourth quarter with crude oil prices up nearly 60% year-to-date and more than 15% over the past month,” said CEO Ed Bastian.

Companies that make or process fuels and chemicals often run on natural gas. filter operator

Valero Energy

VLO said its operating expenses rose 6% in the third quarter due to higher natural gas prices. Any other business – including office work – that uses large amounts of electricity can be damaged when energy prices rise. Natural gas now accounts for the largest share of electricity generation in the United States.

Industrial firms can also be hit, with their operating expenses rising. According to the Producer Price Index, the fuels processed and used in manufacturing — things like oil, grease, natural gas and diesel — are on average 34% more expensive than they were a year ago. This, along with supply chain problems around the world, is causing some industrial companies to warn investors that their profit margins could be hurt.

German chemical company

sorry

(BASFY) said higher natural gas prices cost it 600 million euros in the first nine months of the year, but price increases in October will make its operations more expensive.

“In essentially all value chains, we continue to experience increased costs for raw materials, energy, transportation, supply chain constraints, and related and highly unanticipated issues related to material availability,” said CEO Martin Brudermüller. The company’s last earnings call.

It’s a global problem that won’t go away soon, and one that consumers are beginning to feel as well.

Write to Avi Salzman at avi.salzman@barrons.com