Are Companies Making a Profit From Inflation?

Written by Jennifer Clark
Posted February 16, 2022

Inflation has become 2022’s keyword. 

According to Investopedia, inflation is "a decrease in the purchasing power of money, reflected in a general increase in the prices of goods and services in the economy."

Inflation has been on the minds of most Americans for the past few months as they’ve noticed price increases for everyday essentials like groceries, gas prices, energy bills, and used car prices… just to name a few.

The most recent consumer price index (CPI) reading has been the highest since 1982. Last week’s data from the government indicates that inflation increased on an annual basis by 7.5%. This rise in inflation has the Federal Reserve feeling the pressure to regulate the economy. 

Earlier in January, Fed Chair Jerome Powell was laying the groundwork for interest rate hikes by telling the public that rate hikes could begin in March. Raising interest rates is one of the best tools that the Fed has to slow down inflation. Higher interest rates tend to result in a slower economy, weakened spending, and encouraged saving.

When inflation was at similar highs in the early 1980s, it took historically high interest rates to bring the economy back to a reasonable level. What’s unique to what’s happening right now with high inflation is most likely caused by supply chain issues. There are still bottlenecks at ports and other ways to distribute supplies to meet America’s high demand. Businesses have been struggling to keep supplies stocked on shelves and to have enough inventory, and demand isn’t going down. 

If interest rates go up, that would slow down spending, but it wouldn’t get products to businesses any faster. There is a lot that needs to be fixed when it comes to labor shortages and supply chains first before we can get inflation to a more realistic percentage. 

The Fed can plan to gradually increase interest rates throughout 2022 to level out the economy, but that's not going to happen until the nation’s issue with supply chains and distribution is fixed. There's a need for more workers in these job positions to help an industry that has already been stretched too thin.

Inflation has made its way into the lives of everyday Americans. And they are noticing price increases for essential items and how it’s affecting their budgets now and in the future. According to the consumer price index, food and energy prices rose 0.9% in January. Fuel oil surged 9.5%, which was more than any other item in January’s CPI report. 

Another interesting statistic was that gasoline prices fell 0.8%. However, the average price per gallon in the U.S. increased to $3.44 in the first week of February. How are gasoline prices decreasing while the price that Americans are paying for gas has been increasing? It appears that maybe gas stations see a way to profit from inflation news.

Americans are aware inflation is a problem right now. They expect prices to rise, so it isn’t quite a surprise when they see gasoline prices rising when they fill up their cars.

These companies see a profit opportunity. They see that they can increase prices and Americans will pay those prices because they think it’s normal because of inflation or because they have no other choice. Americans need gasoline and groceries. That is a demand that won’t go away. But it isn't fair that American budgets are the ones to suffer and not major companies' profit margins.

PepsiCo (NASDAQ: PEP) isn’t hiding that it is making a profit while Americans are hurting. The company doesn’t want its profit margins to be affected by surging inflation. PepsiCo's vice chairman and CFO, Hugh Johnston, told Yahoo Finance Live this:

With levels of inflation and commodities as high as they are right now, we clearly are going to have to take some pricing. We have been investing heavily in our brands and heavily in product innovation. Because the world is in a bit of a stressful place, the simple pleasures of our products I think people are generally finding worth paying a few pennies more for. You will see pricing up a bit. 

Refinitiv has reported that earnings for the 2021 fourth quarter are expected to increase more than 22% for S&P 500 companies. Even NPR reported that data from the U.S. Commerce Department indicated corporate profit margins are the highest they’ve been in 70 years. So what happened?

These big companies raised prices above inflation. A professor of economics at the University of Massachusetts-Amherst told NPR:

 What we have seen is that profits are skyrocketing, which means that companies have increased prices by more than cost. In the earnings reports, companies have bragged about how they have managed to be ahead of the inflation curve, how they have managed to jack up prices more than their costs and as a result have delivered these record profits.

While this is good news for these big companies, it’s terrible news for the average American consumer. Any salary raise they may have received over the last few years is going to feel like it isn't making a meaningful difference, and they may end up in a similar position to the one were in before that raise.

Apparently, the Biden administration is aiming at companies that are raising prices more than their costs require. The president mentioned that he will have the Federal Trade Commission investigate any possible market manipulation or price gouging. However, this type of oversight is only happening within the energy sector. 

It’s going to be an interesting rest of the year. The Fed is expected to meet on March 15 and 16, and that could very well be the time that we get news on any interest rate increases and hopefully a game plan from the government.

Until next time,

Jennifer Clark
Pro Trader Today
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