Another reason for the market sell-off revealed during earnings conference calls: rising inflation

While the markets made a big deal about the 10-year Treasury hitting 3 percent Tuesday, a related issue is getting even more attention: commodity and wage inflation.

Higher inflation expectations can drive up interest rates. On earnings calls Tuesday and in the last week, many companies have commented on higher costs and the general negative impact on margins.

A sample:

Caterpillar: Expects "steel and other commodity costs to be a headwind all year."

3M: Seeing higher-than-anticipated costs for transportation and raw materials derived from crude oil.

Kimberly-Clark: Margins "impacted by significant commodity inflation"

Whirlpool: Sees "significant raw material inflation" impacting margins

Procter & Gamble: "Higher commodity costs reduced core earnings per share growth by approximately five percentage points."

This is only a small sample.

Other companies — including Pentair — also mentioned higher wage costs. Halliburton, noting higher levels of oil activity, said "given the level of activity today, there will likely be wage inflation and additional pricing will be necessary for cost recovery."

What about that additional pricing? Can companies raise prices to cover the higher costs? The answer is, it depends. Consumer staples companies have loudly complained that they do not have pricing power. For a Procter & Gamble or Kimberly-Clark, commodity inflation is a major problem and a threat to margins.

Not everyone is so constrained, however. Some — including Fastenal — noted that the have inflation clauses in some of their contracts that will protect them. Others felt more confident that they could simply raise prices: United Technologies said they were able to partially raise prices, and noted there were additional price increases lined up for the rest of the year. 3M said "we expect price growth to remain strong and that it will more than offset raw material inflation."

Finally, Stanley Black & Decker highlighted that productivity gains (improvements in manufacturing) would also be a help: "And so, to the extent that price does not necessarily cover all of the inflation, it is still possible to have margin accretion in this business because of the productivity that we consistently generate..."

Let's hope so.

The big issue is, how much will inflation affect margins? It's too early to tell, but companies are clearly sending a warning signal. Margins for the S&P 500 are near 10 percent and have been there for several years, at historic highs. If margins are impacted by even a small amount...say, 30 to 50 basis points...that could be a significant problem.

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