Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / How Inflation Disguises Rising Corporate Margins
Transcript
- Lucas: Luna, I was looking at the latest PCE price index data from March — it's at 130.3, up from 129.48 the month before. That's about a 2.5% annualized increase, pretty much in line with where we've been. But here's what caught my eye: corporate profit margins are hitting levels we haven't seen since the early 1960s. Luna: Wait — so prices are still going up at a moderate clip, but companies are making more per sale than they have in decades? How does that square with the inflation narrative? Lucas: It doesn't, and that's the point. There's a growing body of research — most recently a paper from the National Bureau of Economic Research published last month — that argues a significant chunk of the inflation we've experienced since 2021 isn't about supply chains or wage pressures. It's about companies realizing they can raise prices more than their costs actually increased, and consumers, for the most part, are absorbing it. Luna: So basically, inflation is acting as cover for higher markups. I've seen that called 'greedflation' in some corners, but I always thought that was a bit too conspiratorial. Lucas: It's not conspiracy — it's just the data. Look, input costs for many companies have come down. Shipping rates normalized two years ago. Supply chains are mostly untangled. But prices at the register haven't come down proportionally. The PCE data shows that the services component, which is less trade-sensitive, has actually been sticky above 4% annualized for the past six months. And that's where margins are thickest. Luna: So the service you're buying — your haircut, your car repair, your streaming subscription — those prices are staying high even though the cost of delivering them hasn't gone up as much. Lucas: Exactly. A haircut in 2019 cost you, say, $40. Now it's $55. The barber's rent went up maybe 10%, their supplies maybe 8%. But the price is up 37%. That delta is pure margin expansion. And it's happening across the economy. The Fed watches headline and core inflation, but they're not parsing out how much of that is cost pass-through versus how much is just higher markups. Luna: But if the Fed doesn't see it, how do we know it's real? I mean, we just saw the S&P 500 hit 7,518, the Dow crossed 50,600. Earnings are strong. Some of that has to be genuine productivity gains or demand. Lucas: Sure, some of it is. But look at the Russell 2000 — small caps are up nearly 4% in the last five days. That index is at 2,926. Small companies tend to have less pricing power than big ones, but they're also showing margin expansion. The New York Stock Exchange composite is up 1.2% over the same period. Broad-based margin growth across market caps tells me this is a structural shift in pricing behavior, not just a few winners. Luna: And gold had a bad week — down 1.4% — which some people interpret as inflation fears easing. But if margins are expanding, maybe the market is pricing in that companies will keep profits high even if headline inflation cools. Lucas: That's exactly what's happening. The ten-year breakeven inflation rate, which is the market's expectation for average inflation over the next decade, is at 2.40% today. That's down from 2.60% a few months ago. So the bond market is saying inflation is moderating. But corporate profits argue the opposite — the pass-through hasn't reversed. Companies are keeping the extra margin. Luna: Jamie Dimon was on CNBC today saying JPMorgan could spend $20 billion on acquisitions. He said 'we are on the lookout.' That's a CEO who sees a lot of cash and a lot of opportunity. If margins were under threat, would he be that aggressive? Lucas: Probably not. And that's the other side of this coin. High margins give companies firepower for M&A, which further concentrates market power, which can then sustain higher prices. It's a feedback loop. The Fed's interest rate on reserve balances is at 3.65%, flat for months. They're comfortable with current policy. But if margins stay elevated, consumer purchasing power continues to erode silently. Luna: So for the average person, what does this mean practically? I know you've been following how this affects everyday budgets. Lucas: It means that even if official inflation numbers come down — say CPI drops to 2.5% — the price level itself doesn't fall. It just rises more slowly. And companies have no incentive to cut prices unless demand collapses. So your dollar buys less than it did in 2020, and that gap isn't closing. The only way to protect purchasing power is to earn a return that outpaces inflation plus this margin expansion. That's why we talk about investing in assets that have pricing power themselves. Luna: Speaking of protecting purchasing power — and I don't want to derail too much — but this conversation about value and margins and what things are really worth, it's exactly the kind of thing that makes this show valuable to me. And I know we keep it ad-free because of listeners who support us. Lucas: Yeah, that's right. We don't run ads. And the only reason we can do that is because some of you choose to support the show directly. If our money conversations have helped you think about a decision differently, you can find us at buy me a coffee dot com slash fexingo. No pressure ever — it just helps us keep doing what we do. Luna: And we mean that. Okay, back to margins. So Lucas, you mentioned that small caps are showing margin expansion too. Is there a specific sector where this is most pronounced? Lucas: Healthcare services and consumer discretionary stand out. Think about dental visits, gym memberships, even pet care. These are services where people are reluctant to cut back, and companies have been able to raise prices well above cost increases. The core PCE for services excluding housing is running at 3.8% annualized. That's stubborn. Luna: And that's not something the Fed can easily fix with rate hikes, because it's not demand-pull. It's corporate pricing strategy. Lucas: Exactly. And that's the uncomfortable truth. Monetary policy is a blunt tool against what is essentially a structural shift in pricing norms. The Fed can slow the economy enough to crush demand, but that risks a recession. Or they can accept that margins are permanently higher and focus on other tools. But they don't have a lot of options. Luna: So what do you advise listeners to do? I mean, if inflation is partly a cover for higher margins, how do you protect your purchasing power? Lucas: Two things. First, invest in companies that have pricing power themselves — ones that can raise prices without losing customers. That's typically companies with strong brands or essential products. Second, look at your own spending. If you're paying more for a service, ask whether the quality has improved. If not, you're just subsidizing someone's margin. Be willing to switch providers or negotiate. That pressure can force margins down. Luna: So being a savvy consumer is also a form of activism. I like that. Lucas: It really is. And on that note, we'll leave it there. Thanks for listening, everyone.