Cutting the Fat: Inflation Finally Hits Profit Margins

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NEW YORK (AP) — Corporate profits have weathered runaway inflation for much of the past year, but those good times may be over.

Profits remained strong even when business costs rose thanks to a simple trick: businesses raised the prices they charged customers more than their own costs rose.

Today, however, more and more companies are seeing their costs rise faster than their revenues. In the parlance of financial executives, their margins are tightening, which is holding back their profits.

Admittedly, corporate profits are still near record highs. S&P 500 companies are reporting overall growth of around 2% for the summer from a year earlier. Many companies also claim that they still have the power to maintain the line on the prices of their products, or even increase them further. But some signs of stress are beginning to appear, and analysts believe even faster margin declines could occur given the fragile economy.

Consider LyondellBasell, an international chemical company. Its chief financial officer recently said the company saw its margins shrink last quarter “across all segments due to rising costs and weak global demand.”

Coffee giant Starbucks, meanwhile, was one of many companies that managed to push through price increases over the past year without a drop in customer loyalty or transactions because of them. . But when executives discussed their latest results earlier this month, interim CEO Howard Schultz said, “We’re definitely not going to try to raise prices during this time.”

Profit margins for S&P 500 companies over the summer appear to have fallen to 11.9%, according to FactSet. This basically means they kept $119 of every $1,000 in sales as profit. That’s down from $122 three months earlier and $129 a year earlier, but still above the average of $113 over the past five years.

One of the main reasons for the declining margins is the recent wage increase that workers recently won. Total compensation for private sector workers rose 5.2% over the summer from a year earlier. Once workers get such raises, companies struggle to take them away.

“The combination of rigid labor costs and a slowdown in end-market/consumer prices has been evident in recent macro data and strongly signals margin pressure,” Morgan Stanley strategists wrote in a recent report.

They are more pessimistic about profit margin trends than most on Wall Street, predicting a 1.5% drop in 2023. That’s why they forecast an 11% drop in earnings for S&P 500 companies next year. .

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