Alcoa (AA): A Weather Vane For Inflation

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Wall St. liked Alcoa’s (AA) earnings. They were down, but no by as much as most analysts had supposed.

Earnings at the metal company dropped 24% to $546 million. Revenue was down 6% to $7.36 billion, but the shares moved up.

The reason for the enthusiasm was simple. Alcoa was able to step on the inflation pedal to keep its margins up. "Higher prices for our products and increased volumes more than offset the increased input costs facing the entire industry," Klaus Kleinfeld, Alcoa chief executive officer, said in a statement.

What Alcoa is saying is not unlike the word coming out the oil and chemical industries. Dow Chemical (DOW) recently raised prices on a number of its products by 20%. The firm did not indicate that it felt these huge increases would badly dent demand. The price of gas and oil are also up, but there is no indication that demand is down sharply.

Part of the strength in Alcoa’s results is due to the fact that is sells much of its product overseas. Customers in Asia are willing to pay higher prices to keep their GDPs moving up. Better to get the building bricks of expansion at a premium than not to get them at all.

Alcoa is the first big US company to report results and those results are telling. The cost of commodities is rising fast, but the amount firms can charge for their refined products is rising faster.

It is textbook inflation.

Douglas A. McIntyre