Why aren’t corporate profits affected by inflation?
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They increase their pricing while maintaining the same percentage if profit. So you could also say that their profit would increase in this regards.
Let’s start by figuring out why you think they aren’t?
Everything that goes into calculating profit is affected by inflation, so the end profit number is absolutely affected.
Not to mention that profit number is now worth less when used to reinvest into the company. So it’s basically a double hit.
A few factors:
– They’re selling inventory at post-inflation prices, but paid for the inventory at pre-inflation prices when ordered months ago. As higher prices hit their inventory re-supply, they may see margins fall.
– Items are marked up on a percentage basis. 50% margin of $9 is more than 50% margin on $8. Say Old Navy paid $8 for a t-shirt and average sale price was $12 (marked up to $16 full MSRP, but sales, etc. drop average sale price) for a $4/unit mark-up. This year, they pay $9 for that t-shirt and 50% average margin means sale price of $13.50, or $4.50/unit mark-up.
– Larger than typical annual cost of living/wage increases for existing employees likely kicked in during Q1, so they don’t show up in Q4 earnings reports. Wages may reduce profits in coming months.
They are affected. Corporations will generally have their input costs rise for labor, raw materials, etc. They will also generally be able to raise their prices to consumers. How much their costs increase and how much they can increase their prices will determine the effect on profits. For some industries inflation is favorable — a residential landlord can cite rising prices and wages to justify a rent increase, but most landlords have a fixed building cost and will only have comparatively mild increases in repair costs. Others may suffer — labor heavy businesses like restaurants will have big increases in costs and may not be able to get consumers to pay a big hike in prices.
They absolutely are. It all depends on the ability of the company to pass on higher costs to consumers, or to reject higher prices from their suppliers.
For example, if Apple raised iPhone prices by 10%, most of their customers probably wouldn’t care so much. But if a restaurant tried to do that, they’d probably lose customers to the next restaurant.
Some companies benefit a lot because they produce the things which are inflating, like oil or metal producers.
They are. When you hear a politician or pundit say something about companies earning record profits during inflation they’re being misleading. For an easy to understand example, let’s say inflation is really, really out of control, and in 1 year prices of absolutely everything double. In that case you’d have something like:
**Year 1**
CompanyA makes $11 million in revenue, spends $10 million in costs, so they therefore have a profit of $1 million dollars
**Year 2**
*Inflation has hit hard and the price of literally everything doubled*
CompanyA makes $22 million in revenue, spends $20 million in costs, so they therefore have a profit of $2 million dollars
Someone who is being honest will note that in both cases, the company made a profit of 10%.
Someone who is dishonest will look at the absolute numbers, see that $2 million is 2x $1million, and claim that the company doubled their profits, while ignoring the fact that inflation made those profits worth half as much
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