Overall inflation is tame according to U.S. government figures. Indeed, the so-called core annual inflation rate -- stripping out energy and food prices -- has remained at a comfortable 2.5% to 3%.But as
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- Packaged-food companies. Food giants such as Kellogg's (K) and General Mills (GIS) can under most conditions pass on price increases -- because there are relatively few producers and they have established brands. I do fear, however, that many of these products are already so sky-high that consumers might resist -- or that other smaller producers or generic substitutes might gain market share.
- High-end restaurants and outlets. If you're already charging $39 for a filet mignon, it's probably not hard to pass on an increase. So the high-end players such as Morton's (MRT) and Ruth's Chris (RUTH) should come out okay -- as will competitors such as PF Chang's (PFCB) that are not too tightly tied to the meat and dairy industry.And then there's Starbucks (SBUX). This company has seen a share-price drop of almost 30% this year -- at least a good part of which is attributed to higher milk prices. Starbucks did raise its prices last year, so another immediate increase is probably not in the cards -- but long term, milk isn't that big of a deal, and this company's brand and pricing power will prevail over rising milk costs.
- Farm suppliers. This one's fairly obvious: Higher crop prices bring more plantings and more prosperous farmers, which can (and has) helped farm suppliers such as Monsanto (MON) and Deere (DE).
- Fast-food restaurants. In all of this, I see fast food restaurants and restaurant operators, such as Yum Brands (YUM) and Chipotle (CMG), as most vulnerable. Margins are tight to begin with, and with the competitive environment, it'll be hard to pass costs on. Look for menu changes or other, more severe signs of pain.
- Grocers. Likewise, conventional grocers such as Kroger (KR) are vulnerable -- competition from Wal-Mart and similar superstores may saddle grocers with costs they can't absorb or pass on.