Companies feel strain of rising commodity prices

Over the past few years, commodity prices have shot up as global demand quickly outpaced supplies. Policymakers around the world have grown increasingly concerned about soaring consumer prices. The uptick in food prices is weighing heavily on businesses and they could soon start offsetting those higher business costs on U.S. consumers.

In China, for example, inflationary pressures have been supported by climbing commodity prices. In March, the country's consumer price index jumped 5.4 percent - its biggest gain in almost three years. Chinese authorities are increasingly concerned about the rise in prices as they fear uprisings could result, much like the recent spate of demonstrations that have occurred in the Middle East and North Africa this year and resulted in the toppling of governments in Egypt and Tunisia.

"China's inflation is a big concern, and actual numbers are worse than officially reported," Carmen M. Reinhart, an economist at the Peterson Institute for International Economics, told the New York Times. In the U.S., the Federal Reserve has come under fire from critics who contend its loose monetary policy has boosted inflationary pressures and could derail the nascent economic recovery.

In a speech he delivered in Stone Mountain, Georgia on April 4, Federal Reserve chairman Ben Bernanke said that the Fed is closely watching inflation and would act to raise interest rates to rein in growth if the personal consumption expenditures index, the Fed's preferred price gauge, rises precipitously.

"So long as inflation expectations remain stable and well anchored," Bernanke affirmed, then "the increase in inflation will be transitory. We have to monitor inflation and inflation expectations extremely closely because if my assumptions prove not to be correct, then we would certainly have to respond to that and ensure that we maintain price stability."

The rising food prices are starting to eat into businesses' profit margins and many analysts contend it is only a matter of time before consumers are forced to absorb those increased business costs. This week, McDonald's Corp said that the higher prices for beef, bread and other food items would cut into its quarterly margins and projected inflation this year would be worse than it originally anticipated.

According to Edward Jones analyst Jack Russo, the food giant now faces the daunting task of how to continue posting strong earnings each quarter. "The key question now will be how they are going to try to offset some of these food costs," Russo told Reuters. McDonald's said it forecasts food costs to rise between four and 4.5 percent in the U.S. this year - more than double the two percent increase it predicted in January.

McDonald's first quarter operating margin declined to 17.7 percent from 18.2 percent as the higher costs for food and paper ate into its margins. Though the Illinois-based restaurant chain beat Wall Street expectations, its shares fell on concerns that higher food prices would deter lower-income customers. Peter Jankovskis, the co-chief investment officer at Oakbrook Investments, said in an interview that analysts are awaiting the summer to see whether the price hikes start to hurt the company's profitability.

"The bottom line is they're still doing a great job of growing revenue," he affirmed. "The big test will come in the summer months with gasoline remaining in the neighborhood of $4.00 (a gallon) - that's when the strength of McDonald's will come through."

Analysts project commodity prices will continue to rise throughout 2011 as supplies dwindle, and it's only a matter of time before businesses start to shift their strategies to adapt to what could be the new normal.