Prices of oil, transport, food ingredients and other commodities have fallen in recent months as shocks from the pandemic and war in Ukraine have eased. Yet many large companies have continued to raise prices at a rapid pace.
Some of the world’s largest companies have said they have no plans to change course and will continue to raise prices or keep them at high levels for the foreseeable future.
That strategy has dampened corporate earnings. And it could keep inflation robust, adding to the pressure used to justify rising prices.
As a result, some economists warn, policymakers at the Federal Reserve may feel compelled to keep raising interest rates, or at least not lower them, increasing the likelihood and severity of an economic downturn.
“Companies don’t just maintain their margins, they don’t just pass on cost increases, they use it as a cover to expand their margins,” said Albert Edwards, a global strategist at Société Générale, referring to profit margins, a measure of how much companies earn from every dollar in sales.
PepsiCo, the maker of snacks and drinks, has become a first example of how big companies have counteracted higher costs, and then some.
Hugh Johnston, the company’s chief financial officer, said in February that PepsiCo had raised its prices enough to meet further cost pressures in 2023. At the end of April, the company reported that it had raised the average price for all its products by 16 percent. in the first three months of the year. That contributed to a comparable price increase in the fourth quarter of 2022 and increased the profit margin.
“I don’t think our margins will deteriorate,” Mr. Johnston said in a recent interview with Bloomberg TV. “What we’ve said for this year is that we’re going to be at least level with 2022, and we could even increase margins as the year goes by.”
The bags of Doritos, cartons of Tropicana orange juice, and bottles of Gatorade drinks sold by PepsiCo are now significantly more expensive. Customers grumbled, but largely continued to buy. Shareholders cheered. PepsiCo declined to comment.
PepsiCo isn’t alone in continuing to raise prices. Other companies that sell consumer goods have also done well.
The average company in the S&P 500 stock index increased its net profit margin from late last year, according to FactSet, a data and research firm, countering Wall Street analysts’ expectations that profit margins would decline slightly. And while margins are below their peak in 2021, analysts predict they will continue to grow in the second half of the year.
For most of the past two years, most companies had “a great excuse to go ahead and raise prices,” said Samuel Rines, an economist and director of Corbu, a research firm that serves hedge funds and other investors. “Everyone knew that the war in Ukraine was inflationary, that grain prices were going up, blah, blah, blah. And they just took advantage of that.”
But those go-to reasons for raising prices, he added, are now diminishing.
The Producer Price Index, which measures the prices companies pay for goods and services before they are sold to consumers, peaked at 11.7 percent last spring. That percentage dropped to 2.3 percent for the 12 months through April.
The Consumer Price Index, which tracks the prices of household expenses from eggs to rent, has also fallen, but at a much slower pace. In April, it fell to 4.93 percent, from a high of 9.06 percent in June 2022. The price of carbonated drinks rose nearly 12 percent in April, over the past 12 months.
“Inflation will remain much higher than necessary because companies are greedy,” said Mr Edwards of Société Générale.
But analysts suspicious of that explanation said there were other reasons why consumer prices remained high. Since inflation peaked in the spring of 2021, some economists have argued that as households emerged from the pandemic, demand for goods and services — whether garage doors or cruise travel — remained unsaturated due to lockdowns and limited supply chains, driving prices higher. became .
David Beckworth, a senior research fellow at the right-wing Mercatus Center at George Mason University and a former economist for the Treasury Department, said he was skeptical that the rapid pace of price increases was “profitable.”
Businesses had some degree of cover for raising prices as consumers were peppered with news of imbalances in the economy. Nevertheless, Mr. Beckworth and others argued that those higher prices would not have been possible if people were unwilling or unable to spend more. In this analysis, government stimulus payments, capital gains, wage increases and the refinancing of mortgages at very low interest rates play a greater role in driving prices higher than corporate profit-seeking.
“It seems to me that many who tell the profit story forget that households actually have to spend money for the story to count,” said Mr. Beckworth. “And once you look at the massive increase in spending, it becomes inescapable to me where the root cause lies.”
Mr Edwards acknowledged that government stimulus measures during the pandemic were having an effect. In his view, this aid meant that the average consumer was not “beaten up enough” financially to resist higher prices that would otherwise make them flinch. And, he added, this dynamic has also put the weight of inflation on the poorer households “while the wealthier will feel it less.”
The top 20 percent of households by income typically account for about 40 percent of total consumer spending. According to credit card data from major banks, total spending on recreational experiences and luxury goods appears to have peaked, but remains robust enough for companies to continue to demand more. Major cruise lines, including Royal Caribbean, have continued to raise prices as demand for summer cruises has increased.
Many people who do not belong to the top of the income class have had to exchange for cheaper products. As a result, several companies targeting a broad customer base have also outperformed expectations.
McDonald’s reported that sales increased an average of 12.6 percent per store in the three months through March, compared to the same period last year. About 4.2 percent of that growth comes from increased traffic and 8.4 percent from higher menu prices.
The company attributed the recent increases in menu prices to higher spending on labor, transportation and meat. Several consumer groups have responded by pointing out that recent increases in transportation and labor costs have eased.
A company representative said in an email that the company’s strong results were not only a result of price increases, but also “strong consumer demand for McDonald’s around the world.”
Other companies have found that fewer sales at higher prices have still helped them achieve bigger profits: a dynamic Corbu’s Mr. Rines coined as “price over volume.”
Colgate-Palmolive, which sells kitchen soaps and other goods in addition to a market share of about 40 percent of the global toothpaste market, had an excellent first quarter. Operating profit for the year through March was up 6 percent from the same period a year earlier – the result of a 12 percent increase in price, while volume fell 2 percent.
However, the recent corporate earnings bonanza may soon begin to fizzle out.
Research from Glenmede Investment Management shows signs that more consumers are cutting back on more expensive purchases. The financial services company estimates households in the bottom quarter of incomes will exhaust what’s collectively left of their pandemic-era savings sometime this summer.
Some companies are starting to face resistance from more price-sensitive customers. Dollar Tree reported rising sales but declining margins as lower-income customers who frequently shop there looked for deals. Shares of the company plummeted Thursday as it revised down its profit expectations for the remainder of the year. Even PepsiCo and McDonald’s have taken a beating recently on their share prices as traders fear they may not be able to continue to increase their profits.
For now, however, investors seem relieved that the companies have performed as well as they did in the first quarter, helping to keep stock prices from falling overall.
Before major companies started reporting how they were doing in the first three months of the year, the consensus among analysts was that earnings of companies in the S&P 500 would fall about 7 percent compared to the same period in 2022. Instead, according to data from FactSet, revenue is expected to be down about 2 percent once all results are in.
Savita Subramanian, the head of U.S. equity and quantitative strategy at Bank of America, wrote in a note that the latest quarterly reports “showed once again that corporate America is able to sustain margins.” Her team raised overall earnings growth expectations for the remainder of the year and 2024.
