Q&A of the Day ā Are Companies to Blame for Continued High Inflation?Ā Ā
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Todayās Entry: This weekend, someone said to me that Inflation was increased by companies that raised prices ābecause they couldā. The example that was used was from Publix that had a 49% increase in profits. But, they only had a 5% increase in sales. Are companies taking advantage of inflation to raise prices?Ā
Bottom Line: There are a couple of principals in play with todayās note. First, the person who presented that scenario to you is misinformed about Publixās operating results specifically, but also economics generally. Letās say for a moment that the scenario presented to you was accurate. In that example, the percentage of the sales increase would have accounted for the increase in prices charged to consumers. In order for there to be a 49% increase in profit attributable to a 5% increase in sales, the operating cost for the business would have had to have dramatically decreased. Instead, it was just the opposite. Iāll specifically address the facts regarding what companies have passed on to consumers but first letās correct the premise of the Publix example you were presented with.Ā
Publixās most recently reported quarter also completed their fiscal year. The numbers cited to you reflect Publixās annual results for the year. Publix reported a sales increase of 4.7% for 2023 which does round to the 5% figure with which you were presented. Likewise, Publix reported a 49% increase in earnings during the fiscal year. So, if those figures effectively are accurate what is the issue? The increase in Publixās reported earnings wasnāt attributable to operations. In fact, Publixās earnings from operations only increased by 1% for the year. What the report shows is the exact opposite of the premise you were presented with. Publix, in fact, not only did not take advantage of consumers by leveraging inflation, Publix didnāt even pass the increase in costs of its operations onto consumers. The companyās operating profit trailed its increase in sales by 3.7%.Ā Ā
The reason Publix reported a 49% increase in reported earnings was due to ānet unrealized gains on equity securities in 2023 and net unrealized losses on equity securities in 2022ā. In other words, the performance of the companyās investments accounted for 48% of the 49% increase in earnings. There are many different factors that can impact what a companyās net earnings are that have nothing to do with operating performance. The Publix example is a common one and many who seek to use companies as scapegoats will latch onto similar false narratives in discussing āwindfall profitsā etc. On that note letās take a look at the bigger picture.Ā Ā
Itās easy to see how much inflation is passed along to consumers because we receive two monthly inflation reports that reflect this information. The Producer Price Index reflects wholesale inflation, or the increase/decrease in operating costs for businesses, and the Consumer Price Index Report reflects the increase/decrease in consumer costs. We received both inflation reports reflecting the changes in costs through April last week.Ā Ā
- The PPI showed wholesale inflation rising by 3.1% year-over-yearĀ
- The CPI showed consumer inflation rising by 3.4% year-over-yearĀ
What this shows is that it is true that, on balance across all industries, costs for consumers have risen faster than the cost for businesses but only by 0.3%. Greater than 91% of the increase in the rate of inflation over the past year is a result of factors that are independent of traditional free market forces (or heavily regulated ones for that matter) a la ācompanies charging more because they canā as was imparted to you. As always there are two sides to stories and one side to facts. These are the facts.Ā Ā