NEW YORK – What is safe from high inflation? So far the profits of large US companies.
Businesses face higher gas and heating bills, as do consumers, in addition to higher expenses on labor and raw materials. But unlike many middle- and low-income Americans, they earned more than enough extra income to cover the extra costs.
Big companies managed to raise the prices of their products, from coffee mugs to car parts to cans of paint, as their customers continued to line up regardless. The result: record profits at the end of 2021, as revenue grew and a good chunk of every dollar of that revenue hit bottom line.
“A lot of the pricing pressures are just passed on” from companies to their customers, said Alex Arnon, associate director of policy analysis at the Penn Wharton Budget Model, a research initiative.
What is uncertain is how long the trend could last, before customers drastically reduce their purchases. A US government report released on Thursday will show how many purchases consumers made in February after factoring in the price hike. In April, more clues will arrive as companies line up to tell Wall Street how much profit they’ve made in the first three months of 2022.
The last series of such conference calls for CEOs was a resounding success for companies. With customers eager to spend and many sitting on savings accumulated with the help of US government stimulus programs, CEOs have often pointed to “low elasticities of demand.” means firms have less incentive to keep prices low.
“The overwhelming message from most companies this earnings season is still that demand remains strong and continues to outpace their ability to meet it,” Deutsche Bank chief strategist Binky Chadha wrote in a recent report on fourth quarter results.
Coffee giant Starbucks raised prices once in October and then again in January, for example. Executives recently told Wall Street they plan more increases to help “ease cost pressures.”
Those past price hikes haven’t deterred Starbucks customers, John Culver, North America group president and chief operating officer, told analysts on a call last month. “On the contrary, demand from our customers continues to grow.”
He made the comments after Starbucks reported a 31% increase in profits for the last quarter compared to a year earlier. Wall Street expected even stronger growth.
Companies are not able to blindly raise prices in all areas. At Amphenol, which sells fiber optic connectors, antennas and other products to manufacturers, CEO Adam Norwitt said prices are easier to raise in some markets than others.
“We were there for our customers during the pandemic,” he said in a call with analysts. “We were there for them when others may not have been through the supply chain crisis. And so that, all things being equal, we are in a good position to be able to kindly ask our customers to share this. »
Amphenol posted record earnings per share and record revenue for the last three months of 2021.
Earnings for S&P 500 companies jumped just over 30% in the last quarter. Margins, which show how much profit companies make for every dollar in revenue, have remained near record highs, even as expenses have risen by hundreds of millions of dollars at times.
In the last three months of 2021, S&P 500 companies kept $12.40 of every $100 of revenue as profit, according to FactSet. That’s a bit less than previous quarters, but still above the $11 average over the past five years.
For the first three months of 2022, analysts expect a further drop to $12.20, in part because costs continue to rise.
The story of many American households has been more painful, with less wealthy Americans being hit hardest by price hikes emanating from businesses. Although many workers got raises last year, they were often not enough to cover higher bills.
According to an analysis by Penn Wharton Budget Model, the typical working household earning between $40,000 and $60,000 earned $2,193 more in 2021 than the year before. This was less than the $2,712 in additional costs due to inflation, leaving this household $519 in the hole.
And the pressure could mount even higher after Russia’s invasion of Ukraine, which caused extreme swings in the prices of oil, wheat and other commodities the region produces.
“So far, the consumer has been able to accept higher prices,” said Nate Thooft, chief investment officer of multi-asset solutions at Manulife Investment Management. “I say so far because the game is being accelerated again with gasoline prices at record highs.”
The exact effect of the war on inflation is unclear. Oil prices have been almost as quick to plunge as they have been skyrocketing recently, for example, given all the uncertainty.
Economists are not surprised that corporate profit margins have remained so high, which they say is the result of the economy roaring after its coronavirus-caused shutdown. Shoppers are increasing their purchases faster than businesses can increase the amount of products on the shelves for sale.
“There’s so much capital out there, it’s so easy to get and almost free” with interest rates near record lows, said Ann Miletti, head of active equities at Allspring Global Investments. “It’s no surprise that growth rates have remained higher, margins have been more sustainable and consumers have more money to spend.”
Now the Federal Reserve has started to raise interest rates to record lows, which should slow buying. U.S. households could also be on the verge of returning to more “normal” shopping activity, which is no longer fueled by as much government stimulus. They can also exhaust the pent-up demand of the pandemic.
The hope of economists is that capitalism will also do what it does, and high profit margins signal to companies that they should increase production to maximize sales. New competitors should also be attracted after seeing the big profits available. All of this should lead to slower price increases and steady erosion of margins.
That’s the optimistic scenario in the eyes of Arnon at the Penn Wharton Budget Model. But he acknowledges the worst-case scenarios that could cause corporate profit margins and inflation to remain elevated. They revolve mainly around an economy that no longer functions well or that is no longer competitive.
“If two years from now we’re talking about margins going up from here,” he said, “that would be the clearest signal.”