By Fortune Editors
January 21, 2011

Something’s gotta give: As commodity costs climb, who will pay the price?

Among the 482 ,871 patent applications that rolled into the U.S. Patent and Trademark Office in 2009, tube-free toilet paper may not have seemed like a major innovation. But Scott Naturals Tube-Free toilet paper — a roll of toilet paper without the cardboard tube in the middle — is on a tear. Environmental groups are heralding its arrival, and with good reason. American households run through about 17 billion toilet paper tubes every year, which adds up to around 160 million pounds of garbage. Anything that tries to eliminate some of that waste is admirable.

But the move by Kimberly-Clark (KMB), which invented the new toilet paper, isn’t just about being green. It’s also about the company’s bottom line, so to speak. Its tube-free toilet paper roll sells for the same price as one that does have a cardboard tube in the middle — and that’s a good thing because Kimberly-Clark, like so many other corporations, suddenly finds itself spending way more on commodities (in this case, paper products) and other supplies. Kimberly-Clark has warned that its 2010 profits won’t meet analysts’ expectations — third-quarter net income dropped almost 20% — largely because its input costs soared by $265 million. The company won’t say how much it saves on each tube-free roll of TP, but every little bit helps.

The commodities crunch is corporate America’s dirty little secret. Even as consumers open their wallets once again and sales volume improves, inflationary pressure is creeping in. It’s hitting companies small and large. And even giant corporations with plenty of heft to negotiate the best possible rates from suppliers are feeling the pinch. Procter & Gamble’s (PG) chief financial officer, Jon Moeller, told us on Squawk Box that the consumer-products giant saw a 160-basis-point impact from higher input costs late last year. For now, P&G has offset that rise with its productivity and cost-saving programs.

That can’t continue indefinitely, of course. Commodities prices continue to skyrocket — last year crude-oil prices were up 17.3%, sugar climbed 25.5%, and wheat rose 49.3% — and eventually will start seriously chomping into corporate profits. (Not that investors have noticed: Thomson Reuters has analysts forecasting a 13.4% climb in corporate profits in 2011.) “Either the revenue picture will start increasing more rapidly over the next few quarters, and that will offset higher costs, or profits will get hit,” says Ashwani Kaul, head of his own investment advisory firm. “Something has to give.”

Some companies are taking matters into their own hands and acting aggressively to push higher costs on to consumers. Cooper Tire & Rubber (CTB) just jacked up its prices for the second time in six months, boosting them 6.5% in November. The company says it expects its raw-materials costs to climb another 2% to 4% in the fourth quarter.

But not every company can raise prices. The worrisome outcome could be paralysis, in which corporations wait even longer to rehire workers in an effort to control costs.

Ironically, those early-warning signs are popping up just as the Federal Reserve unleashes its unprecedented effort in monetary easing, pouring an additional $600 billion of our money into Treasury purchases in an attempt to stave off deflation. It’s a move designed to ensure that there is plenty of liquidity to boost the economy, but too much liquidity can be a bad thing — it can send inflation into overdrive. And the Fed has never been accused of being forward-looking. It’s a data-dependent entity that waits to act until it digests methodically collected numbers (sometimes months old).

Let’s just hope that the more up-to-date cost increases we’re hearing about from corporate America aren’t a harbinger of more ominous things to come on the inflationary front. Otherwise, all that money the Fed is pumping out could wash over us like a flood, sending prices soaring and crushing consumers. And that’s a mess all the paper products in the world won’t be able to sop up.

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