The U.S. Federal Reserve Board might be underestimating the possibility of inflation due to companies seeking bigger profit margins warns brokerage firm National Bank Financial.

In a new report, NBF says that profit margins are a central element to the benign inflation outlook presented yesterday by Fed chairman Alan Greenspan. Profit margins of non-financial corporations are currently very high from an historical standpoint, it reports. “The Fed chairman assumes that businesses are limited in the degree to which they can fatten margins by raising prices since any tendency for margins to continue to rise would be countered by the entry of new competitors which would return markups to more normal levels,” it says. “As such, Mr. Greenspan does not believe that the upward trend in unit labour costs threatens price stability.”

However, NBF says that it’s not as convinced as Mr. Greenspan that firms will abide by this scenario. “Monetary policy is still a long way off from being neutral, capacity utilization is rising, and the ISM supplier delivery index — an indicator of supply bottlenecks — is the highest in 25 years,” it points out. “This is not conducive to a significant contraction in margins. Cost push inflation may be a bigger risk than what the Fed currently believes.”