Strong first-quarter corporate earnings delivered the latest bit of evidence that the global economic recovery continues, albeit slowly. We’re the last to look a gift horse in the mouth, but the news begs the question: Does the phrase “recovery” still apply? Recovery, after all, suggests that we will return to a previous state of robust growth. The sluggish US economy and ongoing sovereign debt concerns in Europe act as a millstone around the global economy’s neck. It seems logical that, once free of these burdens, the global economy will sprint ahead. But it may be time for investors to face up to a new reality: What you see is what you get. 

Rising prices emerged as a major theme in quarterly conference calls. Although the Federal Reserve maintains that inflation is under control, rising fuel and input costs have pressured margins at all manner of firms. After three years of penny pinching and cost cutting to maintain profits, management teams are eager to protect their hard earned margins.

Higher input prices will remain a fact of life for the foreseeable future. A swelling middle class across the globe and a continuing economic recovery will boost consumption, straining supplies of everything from food to oil. Although new technologies and substitution will help to control prices, these processes can only go so far to reduce consumption.

The central question is whether corporations can pass on these higher costs to battered consumers.  They can and they should.

The hard reality is that market pricing mechanisms are the best way to ration supply. Furthermore, companies that don’t recoup their costs with at least some measure of profit are destined for the dustbin. High prices seem a fait acompli.

Companies must maintain profitability while keeping prices at bearable levels for consumers. It’s a tightrope walk more easily achieved by Proctor & Gamble (NYSE: PG) and other firms with strong brands. The new reality disadvantages firms that command little consumer loyalty. In commodity prices remained elevated for a prolonged period, the spoils will go to the mighty. Firms with pricing power will muscle out smaller fry, growing all the more attractive to investors.

Consumers should gird themselves for rising costs; the virtues of frugality and saving will be more important than ever. Investors should seek companies that command pricing power in their industries and hedge their portfolios against inflation. Although many market watchers expect commodity prices to ease in coming months, it will likely prove a short respite.