Brands profiteering from inflation

Virtually every nation in the world is struggling with skyrocketing inflation rates, though the rate is increasing higher in the US than in most countries. The United Kingdom, for example, reported a 5.4% inflation rate in December. But that’s not the real inflation rate.

The average rent in the United States is nearly $1,900 a month, an increase of almost $300 over this time last year — and that’s the average, remember, while some cities like Miami have seen a 40% year-over-year increase of rents.

Car prices, both new and used, are increasing as well. One Ford dealer in New Jersey is trying to charge a $15,000 adjustment fee for a new Bronco.

But are rising prices the result of inflation? The answer is NO.

Starbucks has been raising prices on their beverages for the past year, but they reported an eye-popping 31% increase in profits, and revenue increased for the quarter by almost 20% to just over $8 billion. On the same call that Starbucks announced those terrific numbers, the corporation also announced that it would raise its prices over the next year — probably more than once.

The company blamed “supply-chain disruptions” and higher costs for labor for the price hikes. Johnson at media nonprofit Common Dreams said they didn’t mention one raise in particular: Starbucks CEO Kevin Johnson’s pay increased by almost 40% last year to more than $20 million.

Journalist Matt Stoller estimated that 60% of the price increases that ordinary Americans are paying are going directly to corporate profits, not to compensate for global supply issues or higher-priced goods.

“What we want to find are companies with pricing power,” said Giorgio Caputo, senior portfolio manager at J O Hambro Capital Management, told Bloomberg. “In an inflationary environment, that’s the gift that keeps on giving because companies can pass along their pricing on the way up and don’t necessarily need to get it back on the way down.”

 That means corporate profits alone are absorbing a 3% inflation rate on all goods and services in America (44.7% of 6.8% annual inflation), with all other factors causing the remaining 3.8%, for a total inflation rate of 6.8%.

In other words, had corporate America kept the same average annual level of profits in 2021 as it did from 2012–2019 and passed on today’s excess to consumers, the inflation rate would be 3.8%, not 6.8%. And that’s a big difference indeed. is the difference between Americans getting a raise and seeing real wages decline. (It could also explain why inflation is lower in Europe — corporate profits there were very good in 2021 but not as good as in the U.S. In Japan, both inflation and corporate profits were low.)

It worsens because one assumes that e price inflationary increases new. But of course, inflation isn’t zero in average years; the Fed has an inflation target of 2%. In 2019, inflation hit 1.8%. So if you take the pre-existing inflation rate in 2019 of 1.8% and back that out of the numbers, then it turns out that 60% of the increase in inflation is going to corporate profits.

3% to corporate profits + 1.8% preexisting inflation + 2% from government spending/supply shocks = 6.8% total inflation rate.

It’s straightforward; brands have bought into the belief that consumers have a lot of cash and want it, so why not raise prices? Unfortunately, consumers are learning that they are getting away with it, which will cost them market share.

About richmeyer

Rich is a passionate marketer who is able to quickly understand what turns a prospect into a customer. He challenges the status quo and always asks "what can we do better"? He knows how to take analytics and turn them into opportunities and he is a great communicator.

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