Prices for oil, transportation, food and other raw materials have fallen in recent months as shocks from the pandemic and the war in Ukraine fade. But many large companies continue to raise prices rapidly.
Some of the world’s biggest companies have said they have no intention of changing course and will continue to raise prices or keep them high for the time being.
This strategy put pressure on corporate earnings. And that could keep inflation steady and contribute to the very pressures used to justify higher prices.
As a result, policymakers at the Federal Reserve feel compelled to keep raising interest rates, or at least not to lower them, which some say could increase the likelihood and severity of a recession. economists warn.
“Companies are not only maintaining their margins, they are not only passing on higher costs, they are using it as a cover to boost their margins,” said Albert Edwards, global strategist at Societe Generale. “It’s profitable,” he said, referring to profit margins, a measure of how much a company earns. From every $1 in sales.
PepsiCo went prime example We’ll talk about how large companies have dealt with rising costs, and some of them.
Hugh Johnston, the company’s chief financial officer, said in February that PepsiCo raised prices enough to ease further cost pressures in 2023. At the end of April, the company said it had raised the average price of snacks and beverages by 2023. In his first three months of the year he was 16%. This added similar price increases in the fourth quarter of 2022, increasing margins.
“I don’t think our profit margins will get any worse,” Johnston said in a recent article. interview on Bloomberg TV. “Actually what we said this year is that it will be even at least until 2022, and it could actually increase margins later in the year.”
Bags of Doritos, cartons of Tropicana orange juice, and bottles of Gatorade sold by PepsiCo are now priced significantly higher. Customers are dissatisfied, but generally continue to purchase. Shareholders cheered. PepsiCo declined to comment.
Other companies that sell consumer goods are also doing well while continuing to raise prices.
The average company in the S&P 500 index has posted higher net profit margins since the end of last year, contrary to Wall Street analysts’ expectations that profit margins would decline slightly, according to data research firm FactSet. . And while profit margins are below their peak in 2021, analysts expect them to continue expanding in the second half of the year.
For most of the past two years, most companies “had the perfect excuse to raise prices,” said Samuel Lines, an economist and managing director at Kolb, a research firm that serves investors such as hedge funds. speaks. “Everybody knew that the Ukrainian war was inflationary and grain prices were going up somehow, somehow, somehow, and they just took advantage of it.”
But the compelling rationale for higher prices is now receding, he added.
The producer price index, which measures the price companies pay for goods and services before they are sold to consumers, hit a high of 11.7% last spring. That rate fell to 2.3% in the 12 months to April.
The Consumer Price Index, which tracks the price of household spending from eggs to rent, is also falling, but at a much slower rate. From a high of 9.06% in June 2022, it fell to 4.93% in April. Soda prices rose nearly 12% in April compared to 12 months ago.
“Inflation will stay higher than it needs to be because businesses are getting greedy,” said Edwards of Societe Generale.
But analysts skeptical of that explanation said there were other reasons for consumer prices to remain high. Since inflation spiked in the spring of 2021, some economists believe that while households emerge from the pandemic, lockdowns and supply chain constraints have pushed demand for goods and services (whether it’s a garage door or a cruise trip) down. were not met and prices rose. .
David Beckworth, a senior fellow at the right-wing Mercatas Center at George Mason University and a former Treasury Department economist, said he was skeptical that the rapid pace of inflation was “profit-driven.”
Businesses were able to cover some of the price hikes amid news of economic imbalances among consumers. But Beckworth and others argue that these price hikes would not have been possible without people’s willingness and ability to spend more. In this analysis, stimulus packages from the government, investment returns, wage increases, and refinancing of mortgages at ultra-low interest rates play a bigger role in pushing up prices than corporate profits.
“A lot of people who talk about profits seem to forget that households have to actually spend money to make that talk work,” says Beckworth. “And when you see the massive spike in spending, it’s hard for me to see where the causality lies.”
Edwards acknowledged that the government’s stimulus measures during the pandemic had paid off. For him, this support means that the average consumer isn’t financially “squeezed” to resist potentially daunting price increases. And while this dynamic puts the weight of inflation on poorer households, “richer households will feel less inflation,” he added.
The top 20 percent of household incomes typically account for about 40 percent of total consumer spending. Overall spending on recreational experiences and luxury goods appears to have peaked, according to credit card data from major banks, but is still robust enough to keep businesses charging extra. Major cruise lines such as Royal Caribbean continue to raise prices as demand for cruises rises for the summer.
Many people who are not at the top of the income bracket have to upgrade to cheaper products. As a result, some companies serving broader customer bases have also performed better than expected.
McDonald’s reported an average 12.6% increase in sales per restaurant in the three months to March compared with the same period last year. About 4.2% of this increase was due to increased traffic and 8.4% due to higher menu prices.
The company attributes recent menu price increases to higher labor, transportation and meat costs. Several consumer groups responded by noting that the recent surge in transportation and labor costs has eased.
A McDonald’s representative said in an email that the company’s strong performance was due not only to price increases, but also to “strong consumer demand for McDonald’s around the world.”
Other companies found that selling less at higher prices still helped them make bigger profits. This is how Kolb’s Lines created the “price over quantity” dynamic.
Colgate-Palmolive, which has approximately 40 percent share of the global toothpaste market, but also sells dish soap and other products, had an outstanding first quarter. Operating profit increased 6% year-on-year in the year to March. This is the result of a 12% increase in price despite a 2% decrease in sales volume.
But the recent bountiful harvest of corporate profits may soon begin to wane.
A study by Glenmead Investment Management found that there are signs that more consumers are reluctant to buy expensive items. Financial services firms estimate that households in the bottom quarter of incomes will have used up their combined pandemic-era savings by this summer.
Some companies are starting to meet resistance from price-sensitive customers. Dollar Tree reported higher sales but lower profit margins as lower-income customers who tend to shop there are looking for deals. The company’s shares plunged Thursday after it lowered its earnings forecast for the rest of the year. Even PepsiCo and McDonald’s stocks have fallen recently as traders worry they may not be able to keep growing profits.
But for now, investors seem relieved that the company posted a similar performance to the first quarter and managed to limit the sharp decline in its stock price.
Before big companies began reporting their first three months of the year, the consensus among analysts was that earnings for S&P 500 companies would fall about 7% year over year. Instead, FactSet data predicts revenue will drop about 2% when all the results are known.
Savita Subramanian, head of U.S. equities and quantitative strategy at Bank of America, said in a note that the latest quarterly report “reinforces the ability of American companies to maintain margins.” Her team has raised its overall profit growth forecast for the rest of the year and 2024.
