Trimming the fat: inflation finally hitting profit margins
Corporate profits have withstood raging inflation over much of the last year, but those good times may be ending.
Profits stayed fat even as companies’ costs rose thanks to one simple trick: Businesses boosted the prices they charged customers by more than their own costs rose. Now, though, more companies are seeing their costs rise faster than their revenues. In the parlance of finance executives, their margins are getting squeezed, and that’s acting as a drag on their profits.
To be sure, corporate profits are still near record highs. But some signs of stress are beginning to show, and analysts say even faster margin declines may be on the way given how fragile the economy is.
Consider Starbucks, one of the many companies that pushed through price increases over the last year with no drop-off in customer loyalty. When executives earlier this month discussed their latest results, interim CEO Howard Schultz said, “We’re certainly not going to try and raise prices during this time.”
One of the biggest reasons for the broad fall in margins is the recent rise in pay that workers have won recently. Once workers get such increases, companies find it difficult to take them away.
Partly because of that, strategists at Morgan Stanley are forecasting a drop in margins of 1.5% percentage points in 2023. That’s why they see a fall of 11% for profits at S&P 500 companies next year.