As the third-quarter corporate earnings season gets underway this week, markets are about to get a sense of the degree to which rising business input costs were absorbed by firms and pulled down their bottom lines.
Nineteen S&P 500 firms report earnings this week starting with the big banks. According to Refinitiv IBES forecasts, profit growth is estimated to come in at 30 percent in the third quarter, down from 96 percent in the previous three-month period.
Increases in commodity costs, labor shortages and supply bottlenecks, and consumer price inflation will be a big part of the story as the corporate earnings season gets underway.
Earnings results will provide a sense of the degree to which firms have been able to pass on rising costs to consumers in the form of higher prices. Consumer price inflation has surged in recent months, running well above the Fed’s 2 percent target.
Biden administration officials and Federal Reserve policymakers have repeatedly characterized the current inflationary spell as transitory, though they have increasingly expressed concern about the risk of a deanchoring of inflationary expectations. That’s where confidence in the transitory narrative erodes and people start to believe and behave as if inflation will be far stickier than previously believed, impacting wage and price-setting behavior and potentially even sparking the kind of upward wage-price spiral that bedeviled the economy in the 1970s.
“These behaviors are evolving, they are changing. Companies feel more confident to increase prices, because prices are going up everywhere,” he said.
Besides evidence of firms passing on higher prices to consumers and boosting wages to attract and retain workers at a time when the U.S. economy has a record-high number of job openings, there is also evidence of a rise in inflationary expectations, at least in a near-term horizon.