Corporate profits

Inflation raises corporate profits, eats away at wage gains

With the annual inflation rate in the United States at its highest level in 30 years, economists and market analysts are highlighting the growing financial divide between businesses and their employees.

In today’s inflationary environment, large companies have higher profits and higher revenues. At the same time, Americans have seen all of their wage gains for the past 12 to 15 months wiped out. For many workers, real wages are falling in several sectors of the US economy.

As the Omicron variant climbs to the top of the list of concerns for consumers, investors and policymakers, the country has ostensibly given up on inflation being a transitional event.

Federal Reserve Chairman Jerome Powell withdrew the word “transitional” during an appearance in Congress on Tuesday. University of Michigan consumer confidence fell in November, while inflation expectations for the next one and five years remained high. In addition, the number of S&P 500 companies citing “inflation” in third quarter earnings calls is the highest in more than a decade.

Customers buy meat at a supermarket in Chicago, Ill., June 10, 2021 (Scott Olson / Getty Images)

Experts note that this widens the wealth gap since high-income people can absorb three-decade-old inflation better than low- and middle-income consumers.

Does inflation pay big dividends?

The cost of doing business is increasing. Wages are rising, businesses are spending more on materials, and shipping and transportation costs are rising.

But they are also registering impressive levels of profitability.

According to data compiled by financial data firm FactSet, companies in the S&P 500 saw year-over-year revenue growth of 17.3% in the third quarter of 2021. This is higher than the estimate of 12.6% as of June 30 and the 14.9% forecast for September 30.

The performance exceeded the five-year average growth rate of 5.8% and the ten-year average growth rate of 3.5%. The 17.3% figure is the second best result since FactSet started tracking this metric in 2008.

All sectors posted growth from July to September, led by energy (74.5%), materials (32%), communications services (20.6%) and information technology (19 , 1%).

The companies that led the way in year-over-year percentage gains were Moderna (3,047%), Norwegian Cruise Line (2,249%), Carnival Corporation (1,661%) and Live Nation Entertainment (1,367 %). When measuring the names of the S&P 500, the top dollar-level companies were Exxon Mobil ($ 27.6 billion), Chevron ($ 20.3 billion), Alphabet ($ 18.9 billion) and Apple ($ 18.7 billion).

Looking ahead, analysts are anticipating stronger year-over-year growth in the coming quarters, but rates could be lower than the three months ending in September.

Despite an economy where everything is more expensive, many companies have indicated that they are passing the cost on to the consumer.

Nestlé, PepsiCo and Procter & Gamble have raised their prices over the past year, saying brand loyalty could help avoid customer backlash.

“We’re very comfortable with our ability to pass through the increases we’ve seen at this point,” Kroger CFO Gary Millerchip said in October.

Others are not as comfortable with stealth inflation.

Vintage photo
Bottles of Pepsi are pictured at a grocery store in Pasadena, Calif., July 11, 2017 (Mario Anzuoni / Reuters)

Fastenal Co., a leading distributor of industrial supplies, charges the higher costs to its customers. However, the company has warned that it may not cope with rising inflation as customer contracts limit how much it can raise prices.

“In an environment where inflation continues to rise quarter after quarter after quarter, there are certain sticking points in our ability to push it through,” Fastenal CFO Holden Lewis said on a conference call. on the third quarter results. “Inflation in the market can increase at a much more orderly and steady rate than our ability to change prices. “

But can consumers continue to bear the rising cost of living?

Inflation wipes out wage gains

According to data from the Bureau of Labor Statistics (BLS), the average hourly wage rose 0.4% in October. Over the same period, headline inflation rose 0.9%.

While workers have benefited from higher wages, the rising Consumer Price Index (CPI) and the Personal Consumer Expenditure Price Index (PCE), the Fed’s preferred inflation indicator, are eroding above-average wage gains this year.

“For now, inflation will continue to outpace very solid wage growth,” Joseph LaVorgna, chief economist for the Americas at Natixis and former chief economist at the National Economic Council under the Trump administration, told CNBC. . “That’s why when you look at consumer confidence, it really takes a hit. Households don’t like the story of inflation, and rightly so.

A tight labor market and huge demand among employers have increased workers’ average hourly earnings by around 5%. However, once inflation is fed into the equation, also known as real wages, workers’ hourly earnings plummeted at an annualized rate of 1.2%.

Arindrajit Dube, an economist at the University of Massachusetts at Amherst, calls this trend the “great recompression.”

“The bottom 40% saw incredible growth in hourly earnings, outpacing growth in prices,” Dube said on Twitter. “At the same time, people between the 50th and 80th percentile (let’s call it the middle class) experienced wage growth below inflation levels. “

Americans’ paychecks are skyrocketing in this economy, but their purchasing power has not reflected the same rate of earnings. In the event of a collapse in economic and wage growth, “we could enter a new inflation regime,” warns LaVorgna.

André Moran

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Andrew Moran covers business, economics and finance. He has been a writer and journalist for over a decade in Toronto, with signatures on Liberty Nation, Digital Journal and Career Addict. He is also the author of “The War on Cash”.