Even if inflation bites, corporate profits remain flush

New York – What is resistant to high inflation? So far, big US companies have made profits.

In addition to high costs for labor and raw materials, businesses are facing higher petrol and heating bills as consumers. But unlike many middle- and low-income Americans, they are earning more than enough extra income to cover extra expenses.

Big companies have successfully raised the price of their products, from coffee cups to auto parts to cans of paint, as their customers stand in line regardless. Result: Revenue rose to record profits by the end of 2021, and a good chunk of every $ 1 of that revenue brought it to the bottom line.

“A lot of the price pressures are going away right now,” said Alex Arnon, co-director of policy analysis of the Penn Wharton budget model, a research initiative.

It is uncertain how long this trend will last before customers reduce their purchases. A U.S. government report on Thursday will look at how much consumers bought in February, taking into account higher prices. In April, more clues will come as companies line up to let Wall Street know how much they have earned in the first three months of 2022.

This kind of last round of conferences for CEOs was an exciting success for companies. Because customers are itching to spend, and many are sitting around with savings created by the U.S. government’s stimulus program, CEOs often “point to less resilience to demand.” This is a way for economists to say that consumers continue to buy even after prices rise, and this means that companies have less incentive to keep prices low.

“The overwhelming message from most companies this earnings season is that demand is still strong and beyond their ability to meet,” Deutsche Bank chief strategist Binky Chada wrote in a recent report on fourth-quarter results.

For example, coffee giant Starbucks raised prices once in October and again in January. Executives recently told Wall Street that it plans further increases to help “reduce cost pressures.”

John Calver, group president and chief operating officer of North America, did not discourage Starbucks customers during a call last month. “Conversely, our customer demand continues to grow.”

He made the remarks after Starbucks reported a 31% profit for the last quarter from the previous year. Wall Street expected stronger growth.

Companies are not able to blindly raise prices across the board. Adam Norwit, CEO of Amphenol, which sells fiber optic connectors, antennas and other products to manufacturers, says that in some markets prices are easier to raise than others.

“We were there for our customers through the epidemic,” he said in a call with analysts. “We were there for them when maybe others were not through the supply-chain crisis. And so, when all things being equal, we should be in a position to ask our customers nicely that they should participate. “

Amphenol reported record earnings per share and record earnings for the last three months of 2021.

Revenue across the S&P 500 Company has grown just over 30% in recent quarters. Margins, which show how much profit companies make in each 1 revenue, remain close to record levels, even after spending sometimes increased by several million dollars.

According to Factset, in the last three months of 2021, companies in the S&P 500 earned $ 12.40 per 100. This is slightly lower than the previous quarter, but above গড়ে 11 on average over the last five years.

For the first three months of 2022, analysts expect further reductions to 12.20, partly because costs will continue to rise.

The story has become even more painful for many U.S. families, where the least wealthy Americans have suffered the most due to price increases from the company. Although many workers increased last year, they were often not enough to cover high bills.

According to an analysis of the Penn Wharton budget model, the average working family earned $ 40,000 to $ 60,000, earning $ 2,193 more in 2021 than the previous year. That dropped to 2,712 in extra costs due to inflation, putting the family in the $ 519 hole.

And the pressure could be even greater after Russia’s invasion of Ukraine, which led to drastic changes in the prices of oil, wheat and other commodities produced in the region.

“Consumers have been able to accept higher prices so far,” said Nat Thuft, chief investment officer at ManuLife Investment Management’s Multi-Asset Solutions. “I say this because the game is rising again with the price of gas at an all-time high.”

The exact impact of the war on inflation is unclear. Given all the uncertainty, for example, oil prices have plummeted almost as fast as they have in recent times.

Economists are not surprised that corporate profit margins remain so high that they say the economy is roaring because of its coronavirus-caused shutdown. Buyers are likely to call everyone who looks appropriate, if there are only a few.

“There’s a lot of capital here, it’s very easy to get and almost free,” said Ann Milletti, head of active equities at Allspring Global Investments. “It’s not surprising that growth rates have remained high, margins have become more sustainable and consumers have more to spend in their pockets.”

Now the Federal Reserve has begun raising interest rates from record lows, which should slow down purchases. U.S. households may return to more “normal” purchasing activity, as opposed to being fueled by government stimulus. They can also deplete paint-up demand from epidemics.

The hope among economists is that capitalism will do just that, and that high-profit margin companies need to increase their productivity to maximize their sales. New competitors should also be attracted by seeing big profits. Which will lead to a slowdown in price growth and a steady decline in margins.

This is the optimistic view in the eyes of Arnon on the Penn Wharton budget model. However he acknowledged that their numbers were not enough to defeat Trump’s government. They mainly focus on an economy that no longer works well or is not competitive.

“If two years from now, we’re talking about margins from here,” he said, “it would be the clearest signal.”

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