Corporate America could suffer a hit to profitability moving forward as Americans reduce their spending power.
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An window of opportunity for companies to boost profits thanks to inflation is shrinking, experts say.
Consumers are likely to spend less moving forward, potentially stamping out “greedflation.”
Other experts say companies won’t be able to absorb higher input costs and thereby inflate prices.
Inflation has been the bane of Americans’ lives for months now, but for companies, it has offered an opportunity to make bumper profits against a backdrop of a slowing economy.
As the cost of groceries, gasoline and other services has risen, customers have become adapted – so far at least – meaning that corporations have been able to pass on those higher input costs and juice their profits.
At the top of the pile are oil majors like BP, Chevron and ExxonMobil, which have reeled in stunning profits while consumers face pain at the pump. BP racked up a total of $8.5 billion for its second quarter this year, while Chevron and ExxonMobil reported that their profits had roughly tripled, per The Washington Post.
People are shelling out record amounts of money to run their cars, cool their homes and even cook their food. But passing on those costs to consumers moving forward will be difficult, according to Craig Erlam, senior market analyst at OANDA. He told Insider companies are going to find it harder as households tighten their purse strings and demand starts to erode.
“The squeeze is going to take its toll and the window of easily passing on cost increases to end consumers is passing,” he said.
“There was a period when passing on higher costs to protect margins was much easier than you would normally see thanks to a healthy labour market and higher savings following the pandemic. That was never going to last and going forward, it’s going to be far more challenging,” he continued.
Goldman Sachs echoed Erlam’s comments recently, saying US companies are going to find it harder to pass on price increases to consumers, meaning corporate profitability will be squeezed as a result.
On the other hand, Michael Hewson, chief market analyst at CMC Markets, argues that companies aren’t going to have any choice but to pass on that inflation to consumers, as their ability to absorb higher input costs will shrink.
“I think it’s going to be stickier than most people realize – it isn’t an excuse – the price of raw materials and energy has increased and the capacity for companies to absorb that has diminished and is likely to diminish further, which means prices are unlikely to come down quickly,” Hewson said.
For Hewson, that window in which companies can pass on price increases to consumers without seeing any demand destruction is becoming more of a necessity as opposed to an opportunity due to underlying problems with the flow of raw materials and other components around the world. “There are supply chains issues – that’s apparent particularly at Chinese ports, and while these have diminished as globalization starts to reverse the reorientation of supply chains is likely to continue,” he said.
Such supply chain issues force the question: “Is the supply chain we currently have the inevitable supply chain that we could have?” said Rakeen Mabud, chief economist at The Groundwork Collaborative.
“The answer to that is pretty clearly no. We could have a supply chain that delivers goods on time, that is able to deal with fluctuations in demand […] but we don’t have that, and we don’t have that because the supply chain that we have is built by big companies for big companies to make their profits as high as possible,” she added.
“Companies are always going to be looking for opportunities to jack up prices beyond what their input costs would justify along with the ‘greedflation’ narrative and this window of opportunity is new and potentially changing,” she said.