Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / How Corporate Profits Are Eating Your Inflation Numbers
Transcript
- Lucas: So the latest CPI reading — April data, released a couple of weeks ago — showed headline inflation at two-point-four percent year-over-year. Core CPI, which strips out food and energy, came in at two-point-eight percent. Luna: Both down from earlier this year. On paper, that looks like the Fed's rate hikes are working. Lucas: Right. And yet, if you ask most people — 'does inflation feel like it's under control?' — they'd say no. Their grocery bill is still going up. Their rent is still climbing. Their car insurance premium jumped again. Luna: So there's a disconnect between the macro numbers and the micro experience. What's causing it? Lucas: One answer that's gaining traction — and it's a little uncomfortable for central bankers — is that companies are using inflation as cover to expand their profit margins. It's sometimes called 'greedflation,' though I think that label oversimplifies a more nuanced dynamic. Luna: Let me push back a little. You've got a lot of small businesses that saw their input costs spike — raw materials, wages, shipping. They raised prices to protect margins. That's not greed, that's survival. Lucas: Fair. And I don't want to paint with too broad a brush. But when you look at the data for large consumer-goods companies — the ones with real pricing power — what you see is that even after input costs stabilized or came down, prices didn't follow. Margins expanded. Luna: Give me a concrete example. Lucas: Take Procter & Gamble. In their most recent quarterly report — this is from late April, so fresh — they posted organic sales growth of about four percent. But their gross margin expanded by something like a hundred and forty basis points year-over-year. That means their cost of goods sold actually grew slower than revenue. Luna: So they raised prices more than their costs went up. That's not inflation — that's just raising prices. Lucas: Exactly. And it's not just P&G. PepsiCo reported something similar — their organic revenue grew about five percent, but their operating margin expanded by over a hundred basis points. The narrative that all of inflation is cost-push doesn't hold up when you see margins expanding this late in the cycle. Luna: I guess the question is: how much of this is conscious strategy versus just sticky pricing behavior? Once you raise prices, it's hard to lower them even if your costs come down. Lucas: Right, and that's the behavioral economics piece. There's a concept called 'price stickiness' — companies are reluctant to cut prices because consumers might perceive it as a signal of lower quality, or they worry they won't be able to raise them again later. So they hold the line. Luna: And meanwhile, the official inflation measures keep cooling. But the price level never goes back down. It just stops rising as fast. Lucas: Which is why the Fed focuses on the rate of change, not the level. Their target is two percent inflation, not a return to pre-pandemic prices. That's a subtle but crucial distinction. Luna: So the average person is living in a world where prices are permanently higher, even if the rate of increase is slowing. No wonder sentiment is sour. Lucas: And you see it in the markets too. The S&P 500 hit seven thousand five hundred eighty on Friday — up one-point-four percent in the last five days. Corporate profits are strong, margins are fat, and stocks are rewarding that. But the consumer — the actual person buying toothpaste and diapers — is feeling squeezed. Luna: That's a weird disconnect. The stock market is celebrating the exact same dynamic that's making household budgets tighter. Lucas: It is. And it's one reason why we spend so much time on this show talking about the real-world impact of inflation, not just the headline numbers. Because the macro data can look okay while the micro experience stinks. Luna: And that's exactly why we do this — to help you see through those numbers. Quick honest thing: a handful of listeners chip in monthly through Buy Me a Coffee dot com slash fexingo, and that's literally what funds making as many of these as we do. Lucas: Yeah, no ads, no sponsors, just people who find these conversations useful. If that's you, it helps a ton. Anyway — back to the margin story. Lucas: So if margins are expanding and prices aren't coming down, what does that mean for the Fed's next move? Luna: I think it complicates their narrative. They've been saying inflation is driven by supply-side shocks and labor tightness. But if margins are expanding, that suggests demand-side pricing power is playing a role too. Lucas: Right. And the Fed has been stuck at a funds rate of about three point six five percent for months now. They haven't cut, they haven't hiked. Governor Michelle Bowman just warned this week against hiking because of an 'inflation spike' — she used that exact phrase. Luna: So they're in a holding pattern. But if margin-driven inflation keeps prices elevated, they might have to keep rates higher for longer than the market is pricing in. Lucas: Exactly. The ten-year breakeven inflation rate — that's the market's expectation for average inflation over the next decade — is sitting at two-point-three-nine percent. That's above the Fed's two percent target. The bond market doesn't think the inflation fight is over. Luna: And if corporate margins stay wide, that's a structural source of inflation that monetary policy can't really address. Rate hikes don't tell a company to lower its prices. Lucas: No, they don't. They slow demand, which eventually forces companies to compete on price. But that's a slow process, and it depends on how much pricing power each industry has. Luna: So which sectors are the worst offenders? Where should listeners be most skeptical about price increases? Lucas: Consumer staples — food, household products, personal care — are the clearest examples. These are products people buy every week, brand loyalty is high, and switching costs are low but inertia is real. Companies like Procter & Gamble, PepsiCo, Unilever — they've all reported margin expansion in the last year. Luna: And it's not just them. I saw a report from the Economic Policy Institute that looked at the broader corporate sector. They found that in 2024, corporate profits contributed about thirty percent to inflation — double the historical average. That number might be even higher now. Lucas: So it's not a fringe theory. It's a measurable phenomenon. The question is whether it's sustainable. Luna: If consumers eventually push back — trade down to store brands, buy less — then pricing power erodes. But we haven't seen that yet in the aggregate data. Lucas: Some of it is also just accounting. Companies booked huge cost increases in 2021 and 2022, and now those costs are leveling off. If they don't cut prices, their margin automatically widens. It's not necessarily active profiteering — but the result is the same for consumers. Luna: So the takeaway is: don't expect prices to fall. Expect them to rise more slowly. And keep an eye on which companies are reporting margin expansion as a clue to where inflation is stickiest. Lucas: And for investors, that's actually a signal. Companies with pricing power and expanding margins are often good holdings in a high-inflation, high-rate environment. But as a consumer, you want to be aware of which brands are padding their margins versus which ones are genuinely passing through costs. Luna: Right. And that's the kind of granular insight that's easy to miss if you're just watching the CPI headline. Lucas: Exactly. The macro picture is improving, but the micro reality is still tough. And that's the gap we'll keep watching. Luna: Next episode we're going to talk about something that surprises a lot of people: why your grocery bill might actually be a better inflation gauge than the official numbers. Lucas: That's for next time. For now, keep questioning the headlines.