Companies Push Prices Higher, Protecting Profits but Adding to Inflation

New York Times

Talmon Joseph Smith
Joe Rennison

By Talmon Joseph Smith and Joe Rennison

May 30, 2023

Corporate profits have been bolstered by higher prices even as some of the costs of doing business have fallen in recent months.

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,” said Albert Edwards, a global strategist at Société Générale, 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 that it had raised the average price across its snacks and beverages by 16 percent in the first three months of the year. That added to a similar price increase in the fourth quarter of 2022 and increased its profit margin.

Inflation F.A.Q.

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What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.

What causes inflation? It can be the result of rising consumer demand. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.

Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains can lead to higher wages and job growth.

How does inflation affect the poor? Inflation can be especially hard to shoulder for poor households because they spend a bigger chunk of their budgets on necessities like food, housing and gas.

Can inflation affect the stock market?Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.

“I don’t think our margins are going to deteriorate at all,” Mr. 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.”

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