Cost pressures are the hottest topic on earnings calls: Morning Brief

First quarter earnings season is less than a week old, but the biggest theme management teams are talking about is clear — higher costs. Yahoo Finance’s Myles Udland discusses.

Video transcript

- We got to talk about earnings, and one of the themes that has been emerging from the earnings reports-- which Myles you highlighted this morning in the Morning Brief-- which has to do with costs, right? As we have had this sort of macro focus on inflation-- whether there's going to be inflation, whether the Federal Reserve is sort of getting it right in terms of its expectations for inflation and how patient it is going to be with inflation-- we're hearing on the more micro front from individual companies about costs, about how they're handling costs.

P&G this morning, talking about raising prices later this year in reaction to higher costs. And you know, it seems like-- and you wrote about this morning-- we're going to hear a lot more of this.

MYLES UDLAND: Yeah, we're certainly going to hear a lot more about higher costs. And I think, you know, Coca-Cola and P&G have given us two great examples of how we are likely to see that conversation play out. Yesterday Coke talked on its call about higher input costs for some of its products, whether it's on, you know, the products to make the cans.

That's obviously been, you know, a pressure point there with aluminum and other things. Or you know, the cost of products to go into the corn syrup and the solution basically to make Coca-Cola. They said that they're thinking it might be kind of a headwind late this year into next year.

And Coke pretty much said, we're not really sure what we're going to do about it. But in general, we take prices in line with inflation, meaning that Coke is not going to be a price setter in the market. It is going to see sort of what the market indicates it can bear, and then move its prices if it does it all, accordingly.

Now, P&G comes out this morning. P&G in a slightly different business. They obviously have a lot of premium household brands. And when you think about, you know, Tide, you are thinking about the kind of brand that is going to tend to command-- that already does command-- a premium in the marketplace.

And P&G coming out and saying that in baby care, feminine care, and adult incontinence-- so I guess diapers on both ends of the spectrum there-- they are going to raise prices effective in mid-September. And that really gets to the other question that I posed in this morning's Morning Brief-- and I pose it, because I don't think there's a good answer yet-- but it is, if economists and Jay Powell see inflation pressures this year as transitory, that means that they are going to see higher inflation readings. And they are going to ignore them.

They're not going to act. We're not going to see a change in the path of monetary policy on the basis of a couple higher months of some pricing pressures. Procter & Gamble is saying they are going to raise prices both in anticipation of this, and perhaps again, in reaction to that. So if prices start to go up in individual goods and services as a result of inflation that is deemed by economists to be transitory, but thus entrenches higher prices, does it end up being transitory I think is kind of the question we're asking here.

Now, compositional effects on inflation, how it's all calculated, we can do a Yahoo U with Brian Chung. On the details of all, and P&G raising prices on diapers for kids and old people doesn't really mean that inflation pressures are here to stay. But I think it outlines, you know, an interesting future as it relates to how corporates see pricing pressures.

And whether they feel compelled to react to them, and thus, how investors are likely to react or not react to some of these narratives, which certainly have been a big part of our conversation here over the last couple of months, and I imagine will be over the next couple.

- Myles, no, that's a good point. I'll say too, and I'll toss this red flag onto the field. You have been writing extensively in the Morning Brief about earnings estimates and how they've been climbing. I asked P&G's CEO this morning, what is the effect? What is the effect of raising prices?

He told me earnings neutral, which is not the first thing you would think, Myles. Raising prices, perhaps your earnings go up. But it looks to be they are just raising prices just enough to offset commodity inflation.

MYLES UDLAND: Yeah, I mean, I think earnings estimates-- sorry, I mean, I just think earnings estimates get to like the broader question about how much growth does the economic cycle imply to corporate bottom lines. And I think P&G, it's that point. So obviously they're saying, you know, we're basically defending against higher commodity costs right now. But again, when they raise prices on those products, they're not going to cut them when commodities get cheaper.

So that's why, you know, I think it's an interesting question is how it relates to the future broader path, you know, some of their products.

- Yeah, I'm also curious, Myles. You know, we keep hearing that we're going to start to see these really wonky inflation readings because of the year ago effects. I don't know, from an economics perspective, how much you can then tease out on top of that, what isn't just because of the base effects from last year. You know, what is additional inflation?

I'll leave that to the economists, and that'll be a question that we can pose to them as the year goes on. And as we see maybe some more examples of all of this.