Companies push prices up, adding to inflation
Firms’ drive to up profits could spark further Fed rate hikes, recession
The prices of oil, transportation, food ingredients and other raw materials have fallen in recent months as the shocks stemming from the pandemic and the war in Ukraine have faded. Yet many big businesses have continued raising prices at a rapid clip.
Some of the world’s biggest companies have said they do not plan to change course and will continue increasing prices or keep them at elevated levels for the foreseeable future.
That strategy has cushioned corporate profits. And it could keep inflation robust, contributing to the very pressures used to justify surging 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 are not just maintaining margins, not just passing on cost increases. They have used it as a cover to expand margins,” Albert Edwards, a global strategist at Société Générale, said, referring to profit margins, a measure of how much businesses earn from every dollar of sales.
PepsiCo has become a prime example of how large corporations have countered increased costs and then some.
Hugh Johnston, the company’s chief financial officer, said in February that PepsiCo had raised its prices by enough to buffer further cost pressures in 2023. At the end of April, the company reported it had raised the average price across its products by 16% in the first three months of the year. That added to a similar size price increase in the fourth quarter of 2022 and increased its profit margin.
“I don’t think our margins are going to deteriorate at all,” Johnston said in a recent interview with Bloomberg TV. “In fact, what we’ve said for the year is we’ll be at least even with 2022 and may, in fact, increase margins during the course of the year.”
The snacks and beverages sold by PepsiCo are now substantially pricier. Customers have grumbled, but they have largely kept buying. Shareholders have cheered. PepsiCo declined to comment.
Other companies that sell consumer goods have also done well while raising prices.
The average company in the S&P 500 stock index increased its net profit margin from the end of last year, according to FactSet, a data and research firm, countering the expectations of Wall Street analysts that profit margins would decline slightly. And although margins are below their peak in 2021, analysts forecast they will keep expanding in the second half of the year.
For much of the past two years, most companies “had a perfectly good excuse to go ahead and raise prices,” said Samuel Rines, an economist and the managing director of Corbu, a research firm that serves hedge funds and other investors. “Everybody 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 rationales for elevating prices, he added, are now receding.
The producer price index, which measures the prices businesses pay for goods and services before they are sold to consumers, reached a high of 11.7% last spring. That rate plunged to 2.3% for the 12 months through April.
The consumer price index, which tracks the prices of household expenditures on everything from eggs to rent, has also been falling, but at a much slower rate. In April, it dropped to 4.93%, from a high of 9.06% last June. The price of carbonated drinks rose nearly 12% in April from 12 months earlier.
“Inflation is going to stay much higher than it needs to be because companies are being greedy,” Edwards of Société Générale said.
But analysts who distrust that explanation said there were other reasons consumer prices remained high. Since inflation spiked in the spring of 2021, some economists have made the case that as households emerged from the pandemic, demand for goods and services — whether garage doors or cruise trips — was left unsated because of lockdowns and constrained supply chains, driving prices higher.
David Beckworth, a senior research fellow at the right-leaning 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 “profit-led.”
“It seems to me that many telling the profit story forget that households have to actually spend money for the story to hold,” Beckworth said. “And once you look at the huge surge in spending, it becomes inescapable to me where the causality lies.”