This page looks at the profitability of businesses. The chart on the left shows the close correlation between global corporate earnings growth and producer price inflation, where higher producer prices usually correlates with higher earnings. A modest pick-up in inflation should help improve businesses’ pricing power, especially for downstream retailers. However, too much sustained inflation could pose a challenge in controlling costs, undermining earnings. Active management is needed to understand which sectors or companies are in a strong position to control costs when this happens.
Also shown are profit margins for the U.S. over history and its inverse relation with how much employees are paid. Firms have been able to preserve margins thus far by controlling certain costs and increasing prices but this predicates itself on still robust demand. Looking ahead, further rise in costs may pose a risk to profitability if demand weakens.