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How Inflation Poses a Risk to Profits

Increasing labor and commodities costs will hurt corporate profits.

The Hackett Group recently conducted research on how inflation negatively affects corporate profits and found that companies could see a 9 percent reduction on their bottom lines, two of the firm's employees write for Business Excellence.

Authors Pierre Mitchel and Michel Janssen said

The Hackett Group recently conducted research on how inflation negatively affects corporate profits and found that companies could see a 9 percent reduction on their bottom lines, two of the firm's employees write for Business Excellence.

Authors Pierre Mitchel and Michel Janssen said that due to rising prices and other factors related to inflation, the average Global 1000 company with revenues of $27.8 billion would lose $150 million in profits annually because of increases in commodity and offshore labor costs. Although some of the expenses can be passed off to customers, roughly half will have to be absorbed, they said.

As Mitchel and Janssen acknowledge, many businesses have already felt the pinch from higher commodity costs, specifically crude oil and metals.

The U.S. Federal Reserve is working to reel in market instability by maintaining a low ceiling on short-term interest rates, The Associated Press reports. Additionally, the Fed is considering creating an "explicit target for 'core' inflation … [excluding' the volatile categories of energy and food," the news source says.

While the Fed's plans could bring more transparency and clarity to its strategy for shoring up the economy, opponents say it could also make inflation more likely in the future.  

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