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Inflation’s 2014 impact for companies like Exxon and Barrick Gold

Phalguni Soni

Will firms' March inflation forecasts impact the Fed’s mandate? (Part 4 of 5)

(Continued from Part 3)

Inflation

Survey results for the Business Inflation Expectations (or BIE) of firms located in the Sixth District for March were released on Friday, March 21, by the Federal Reserve Bank of Atlanta. The 196-firm survey pegged business inflation expectations for the year ahead at 1.8%—lower than the 2% estimate released in February. Inflation uncertainty, at 2.4%, was unchanged from last month.

Special survey question: Projected growth in unit sales over the next 12 months

This month, firms were asked to project three scenarios, for low, medium, and high growth in unit sales over the next 12 months. Firms were also asked to assign probabilities or percentages to the likelihood of each of the scenarios. According to the survey responses, firms projected an average sales growth of 3.7% over the coming 12 months. The responses ranged from a high growth scenario of 10.8% to a decline in unit sales of 3.6% (a low growth scenario). The medium case scenario unit sales growth was reported at 4.4%, with a probability of 51.3%. Probabilities assigned for the low and high growth scenarios were 25.5% and 23.7%, respectively.

How did costs and profit margins change over last year?

Firms also reported that, compared to this time last year, their unit costs are up 1.7%—slightly lower than February’s figure of 1.8%. Profit margins also declined, with about 60% of respondents indicating their profit margins were below normal, compared to 54% in January and 52% in February.

Hedging against inflation

Two of the best sectors that offer a hedge against inflation are the precious metals and natural resources sectors, as they’re based on real commodities that tend to hold their values better during times of stress, and secondly, companies in the natural resources sector find it easier to pass on cost increases to customers. One ETF offering exposure to publicly traded gold (GLD) companies worldwide is the Market Vectors TR Gold Miners ETF (GDX). The top ten holdings in the ETF include Barrick Gold Corp. (ABX) and Goldcorp (GG). Popular commodity ETFs include the iShares North American Natural Resources ETF (IGE), which tracks the S&P North American Natural Resources Sector Index. Top holdings in the IGE include Exxon Mobil (XOM) and Chevron (CVX).

To find out about the implications of the BEI survey and how they may impact ETFs like TLT and AGG, read on to Part 5 of this series.

Continue to Part 5

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