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 leads to higher earnings (or vice versa). 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. Profit margins have been rising from the low point but expanding profitability will continue to be an important driver of earnings growth, as stronger economic activities should boost revenue.