Will corporate margins be the next victims of inflationary pressures?Posted: February 20, 2011
Corporate profit margins have hit record levels, but it seems inflationary pressures are waiting in the wings to send those margins back toward the mean. Zero Hedge summarizes the latest Philly Fed report, pointing out that prices paid less prices received has not been higher since 1979.
- businesses try to increase prices, can’t, and see their margins cut;
- businesses do raise prices, people buy less, and revenue gets hit.
The stubbornly high unemployment rate has convinced many that resistance to price increases is a foregone conclusion. However, I would like to layer on a more nuanced scenario here. Given that increasing employment is the Federal Reserve’s stated goal of its latest quantitative easing program, we should assume that the Fed’s response to either of the above scenarios will be more quantitative easing. If profits or revenues fall, companies will not hire more workers in response. If anything, companies will fire more workers. In other words, even with inflationary pressures building in the economy, especially in scenario #2, the Federal Reserve could actually find more reason to continue adding to those pressures. We may not get a self-reinforcing negative feedback loop, but it will feel close!
The Bank of England already faces this conundrum of accomodative monetary policies even in the face of stubbornly high inflation – but governor Mervyn King has found a lot of comfort in the United Kingdom’s current output gap and a conveniently tame outlook for inflation.
So, what if quantitative easing actually works and increases employment? Well, there should be a lot of increased prices waiting to eat into those newly minted paychecks.
It seems everywhere we look, inflationary pressures are inescapable. Corporate margins may be the last canary in the coal mine…