Inflation Lifting Corporate Profits, Eating Away Wage Gains

A customer wears a mask as she waits to get a receipt at a register in a Target store in Vernon Hills, Ill., Sunday, May 23, 2021. AP Photo/Nam Y. Huh

With the U.S. annual inflation rate at a 30-year high, economists and market analysts are spotlighting the expanding financial divide between corporations and their employees.

In today’s inflationary environment, large companies are reporting greater profits and revenues. At the same time, Americans have witnessed all their wage gains from the past 12 to 15 months eliminated. For many workers, real wages are down in multiple sectors of the United States economy.

As the Omicron variant of the virus that causes COVID-19 climbs to the top of the list of concerns for consumers, investors, and policymakers, the country has ostensibly given up on inflation being a transitory event.

Federal Reserve Chair Jerome Powell retired the word “transitory” during an appearance in Congress on Nov. 30. The University of Michigan’s consumer sentiment fell in November, while inflation expectations for the next one and five years remain high. In addition, the number of S&P 500 companies citing “inflation” on third-quarter earnings calls is the highest it has been in more than a decade.

Customers shop for meat at a supermarket in Chicago, on June 10, 2021. Scott Olson/Getty Images

Experts note that this is expanding the wealth gap, since high-income individuals can better absorb three-decade highs in inflation than low- and middle-income consumers.

Inflation Brings Big Profits?

The cost of doing business is escalating. Wages are growing, companies are spending more on materials, and shipping and transportation expenses are increasing.

But companies also are recording impressive levels of profitability.

According to data compiled by financial data firm FactSet, S&P 500 companies reported year-over-year revenue growth of 17.3 percent in the third quarter of 2021. That’s above the 12.6 percent estimate on June 30 and the 14.9 percent forecast on Sept. 30.

The performance topped the five-year average growth rate of 5.8 percent and the 10-year average growth rate of 3.5 percent. The 17.3 percent figure is the second-best reading since FactSet started tracking the metric in 2008.

Every sector posted growth in the July-to-September period, led by energy (74.5 percent), materials (32 percent), communication services (20.6 percent), and information technology (19.1 percent).

Companies that led the way for year-over-year gains on a percentage basis were Moderna (3,047 percent), Norwegian Cruise Line (2,249 percent), Carnival Corp. (1,661 percent), and Live Nation Entertainment (1,367 percent). When measuring S&P 500 names, the top companies on a dollar-level basis were ExxonMobil ($27.6 billion), Chevron ($20.3 billion), Alphabet ($18.9 billion), and Apple ($18.7 billion).

Looking ahead, analysts are anticipating more year-over-year growth over the coming quarters, but the rates could be lower compared to the three months ending in September.

Despite an economy in which everything is more expensive, many businesses have been transparent about passing increasing costs to the consumer. Nestlé, PepsiCo, and Procter & Gamble have raised prices over the past year, asserting that brand loyalty could help void any customer backlash.

“We’ve been very comfortable with our ability to pass on the increases that we’ve seen at this point,” Kroger CFO Gary Millerchip stated in October.

Others aren’t so comfortable with stealth inflation.

Bottles of Pepsi are pictured at a grocery store in Pasadena, Calif., on July 11, 2017. Mario Anzuoni/Reuters

Fastenal Co., a major distributor of industrial supplies, is allocating the higher costs onto its customers. However, the company warned that it might not keep up with rising inflation because client contracts limit how much it can raise prices.

“In an environment where inflation continues to rise quarter after quarter after quarter, there are certain sticking points within our ability to push it through,” said Fastenal finance chief Holden Lewis in a third-quarter earnings call. “Inflation in the marketplace can rise at a much more methodical and smooth pace than our ability to change prices can.”

But can consumers continue to endure the swelling cost of living?

Inflation Erases Wage Gains

According to data from the Bureau of Labor Statistics (BLS), average hourly earnings rose 0.4 percent in October. During the same period, top-line inflation advanced 0.9 percent.

While workers have enjoyed bigger paychecks, the climbing consumer price index (CPI) and the personal consumption expenditure (PCE) price index, the Fed’s favorite inflation gauge, are eroding this year’s above-average wage gains.

“For now, inflation is going to continue to run above very solid wage growth,” Joseph LaVorgna, chief economist for the Americas at Natixis and former chief economist for the National Economic Council during the Trump administration, told CNBC. “This is why when you look at consumer confidence, it’s really taking a beating. Households do not like the inflation story, and rightly so.”

A tight labor market and enormous demand among employers have increased workers’ average hourly earnings by about 5 percent. However, once inflation is inserted into the equation, also known as real wages, workers’ hourly earnings have tumbled at an annualized rate of 1.2 percent.

Arindrajit Dube, an economist at the University of Massachusetts–Amherst, calls this trend the “Great Re-Compression.”

“The bottom 40% saw incredible growth in hourly earnings, surpassing price growth,” Dube wrote on Twitter. “At the same time, those between the 50th and 80th percentile (call it the middle class) experienced wage growth below inflation levels.”

Americans’ paychecks are ballooning in this economy, but their purchasing power hasn’t mirrored the same rate of gains. Should there be a collapse in economic and wage growth, “we could be entering a new inflation regime,” LaVorgna warned.