Consumers, Not Companies, Bearing Brunt of Inflation: Report

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

WASHINGTON—Widespread commodity shortages are raising production costs for many consumer brands, from Coca-Cola to Hershey’s chocolate to Colgate. However, companies so far see inflation as a boon to their profits, since they can pass higher costs on to consumers without facing competitive pressure.

More S&P 500 companies are commenting on inflation than normal during their earnings conference calls, according to FactSet, a financial data provider.

While executives have raised concerns about soaring raw material costs, a closer look at companies in the consumer goods sector showed that the majority of them haven’t reduced earnings predictions for this year, as they’ve found ways to mitigate inflation.

“At least for companies in the consumer staples sector, it does not appear higher inflation is having a negative impact on full-year earnings and net profit margins at this time,” John Butters, senior earnings analysts at FactSet, wrote in a report.

“Overall, 18 of the 26 companies in this sector stated they had already increased prices or were willing to increase prices to help offset inflation.”

FactSet reviewed hundreds of earnings calls for the first quarter, spanning from March 15 through June 15, and found that 197 companies in the S&P 500 mentioned inflation, the highest figure since 2010. And at the sector level, consumer staples (84 percent) and materials (75 percent) sectors had the largest percentage of companies that cited inflation.

In aggregate, the estimated earnings growth rate and profit margin for the entire S&P 500 are higher today when compared to March estimates, indicating that companies are offsetting higher costs with increased pricing. For consumer staples, the estimated earnings growth rate for 2021 rose from 5.2 percent in March to 7.2 percent.

Major food and beverage companies, including Kraft-Heinz, Coca-Cola, Hershey, poultry producer Tyson Foods, and the packaged food company ConAgra Brands have benefited from recent price hikes.

“All I can tell you is I feel good about our ability to pass through our cost inflation,” Carlos Abrams-Rivera, U.S. zone president at Kraft Heinz Co. told analysts during an earnings call on April 29.

The current environment allows companies to push prices higher, according to David Marberger, chief financial officer of ConAgra Brands, Inc. He said that the rate of inflation would continue to accelerate over the next few quarters.

“History shows us that price adjustments are more likely to be accepted in the market when industry-wide and broad-based input cost inflation occurs, and that’s the environment we see today,” Marberger told analysts.

Coca-Cola Chief Financial Officer John Murphy expressed a similar sentiment during an April 19 earnings call.

“I think it is important to highlight that as an overarching principle around the world, we typically look to take pricing in line with inflation,” he said. “I would expect that that principle will continue to be adhered to as we move into the back half of 2021 and even then into 2022.”

Multinational consumer products companies such as Colgate-Palmolive and Procter & Gamble have also responded to rising costs by increasing prices and have not seen competitive pressure as a result.

“We’ve got to be courageous and bold in that regard,” Noel Wallace, CEO of Colgate-Palmolive Co. told analysts on April 30. “Obviously we watch that carefully based on what’s happening in the local marketplace, but just straight price increases will continue to be an important element.”

Companies also use other methods to manage inflation, including productivity improvements and cost savings.

This year, the global chip shortage has idled some automotive plants and delayed shipments of new vehicles. As a result, new and used car prices in the United States have skyrocketed.

The worldwide chip shortage is now driving up prices for laptops and printers, according to a Wall Street Journal report. HP, for example, has increased its computer prices by 8 percent and its printer prices by more than 20 percent in a year due to component shortages.

The Federal Reserve on June 16 made a significant revision to its short-term inflation forecast, reflecting large spikes in prices. The central bank, however, maintained its baseline view that the recent rise in inflation will prove “transitory.”

However, there’s now “a much greater sense of uncertainty and humility around this view,” according to Matthew Luzzetti, chief U.S. economist at Deutsche Bank.

It was clear Fed officials were “more concerned than at the last meeting, no doubt driven by recent inflation upside surprises and the sharp rise in some measures of inflation expectations,” Luzzetti wrote in a recent report.

Economists at Stanford University’s Hoover Institution John Cochrane and Kevin Hassett warned that the Fed could repeat the mistakes of the 1970s when the country grappled with double-digit inflation.

“Inflation has been so low for so long that most Americans understandably see persistent inflation as ancient history, and that any blip up today will quickly be reversed,” Cochrane and Hassett, who was also a former Trump administration economic adviser, wrote in a blog.

“Yet faith that our government will take prompt action to reverse inflation seems increasingly unfounded.”