The degree to which companies have passed on higher costs to consumers and helped fan inflation has become a hot button topic.
Now, economists at Goldman Sachs Group Inc. are wading into the debate, albeit indirectly.
In research published this week, economist Manuel Albecasis says he expects corporate profit margins to stay high in 2024 even as input costs have fallen 3% over the past year. That’s happening in part because companies have so far resisted passing on their savings to consumers even as material prices decline and supply chains normalize.
“While we have previously found that input cost changes are mostly passed onto final prices in the long run, we find that companies pass through input cost increases faster than input cost declines,” Abecasis writes. “Assuming intermediate inputs remain at their current levels, we estimate that lower input costs should boost nonfinancial corporate profit margins by 0.2 percentage points in 2024.”
While you won’t see the loaded term “greedlation” anywhere in the Goldman note, the research feeds into an ongoing discussion about the degree to which companies have raised prices in order to pad or preserve their profit margins. UMass AMherst economist Isabella Weber has previously referred to the idea as “sellers’ inflation,” while UBS’s Paul Donovan has dubbed it “profit-led inflation.”
Here at Odd Lots, we like to call it “ excuseflation” to capture the idea that companies have been able to point to a host of overlapping emergencies and disruptions to justify raising prices. Now, as the list of excuses starts to shrink, the question is whether companies will start to lower their prices too.
Whatever term you choose to use, Goldman’s research shows that companies are more reluctant to pass on input price decreases than increases. Using oil prices and the Producer Price Index, Goldman estimates that the recent decline in intermediate costs will probably boost profit margins by 0.1 to 0.2 percentage points this year.
The good news for consumers — when it comes to prices at least — is that Goldman expects lower input costs to expected to eventually feed through into lower profits (Though there’s still an open question about whether companies will want to pull on other levers to preserve margins, like reducing jobs). Pressure to reduce prices might be particularly acute for companies that face stiff competition from imports, such as manufacturing, Abecasis noted.
“Our findings suggest that lower input costs will likely boost profit margins in the next few months,” Abecasis said. “On the flip side, the eventual passthrough of lower input costs should weigh on margins in 2025 relative to 2024.”
Of course, Goldman isn’t alone in this assertion. Samuel Rines, strategist at Corbu, has argued that companies are moving from a “Price Over Volume (POV)” strategy, where they prioritized higher prices over sales volume in the years immediately after the pandemic, to a “Price and Margin (PAM)” regime, where they now seek to preserve margins as much as possible.