US economy

US companies push rising costs on to customers


Blue-chip US companies are confident they can pass on rising costs to their customers and protect record profit margins as inflationary pressure is offset by buoyant business and consumer sentiment.

Cost inflation has been a recurring theme of US second-quarter earnings announcements from companies in industries as diverse as retail and industrial equipment. Executives have pointed to a combination of higher freight and labour costs with increased prices for raw materials, some of which has been driven by the Trump administration’s tariffs on imported steel and aluminium, and by other countries’ retaliatory tariffs on US goods. 

This was largely offset in the quarter by a robust economy however, boosted by last December’s tax reforms and a strong employment market. 

“I think there is, overall, very little pushback on price increases,” Michael Larson, chief financial officer of Illinois Tool Works, told a Jefferies conference earlier this month. The price increases stemming from rising raw material costs and tariff effects were “well understood” by customers, he said, and underlying demand remained strong, allowing the company to offset higher costs with increased pricing “dollar for dollar”. 

Doug McMillon, Walmart’s chief executive, also pointed to a strong US economy providing support for price increases at a retailer known for its low-price focus. “Customers tell us that they feel better about the current health of the US economy as well as their personal finances,” he told analysts last week. 

2.8%

US core producer price rise in year to July 2018

Companies that have announced price increases include Coca-Cola, Kraft Heinz, Stanley Black & Decker and Whirlpool, but not all have yet taken effect. Caterpillar told investors that its price increases came into effect on July and should offset the “material” cost increases and tariff impacts it expects in the second half of the year. 

Kimberly-Clark said it would raise the price of brands such as Kleenex and Huggies by mid- to high-single digits early next year, to offset higher commodity costs. 

Newell Brands, the company behind consumer products from Rubbermaid containers to Sharpie pens, announced higher pricing in anticipation of tariffs that could cost it $100m a year, but Michael Polk, its CEO, cautioned: “We don’t know yet how much of the pricing will stick.”

The ability to pass on higher costs has allowed companies to protect and in many cases boost their profit margins. “Following the best earnings season since 2010, S&P 500 profit margins have now risen to an all-time high,” Goldman Sachs analysts noted. Second-quarter earnings for companies in the S&P 500 index are on track to increase 24.6 per cent from the same period of last year, according to Thomson Reuters I/B/E/S. 

Goldman cautioned, however, that margin growth is likely to slow, as the “tailwinds” of tax cuts fade, global growth moderates and wage pressures and interest rates both rise. ADP recorded US wage growth of 3 per cent in the second quarter, and core producer prices rose 0.3 per cent month-on-month in July to stand 2.8 per cent above their level a year earlier.

A weak reading on Friday from the University of Michigan’s preliminary consumer sentiment survey for August has raised questions about sensitivity to rising prices, particularly among poorer consumers, with the report’s chief economist saying that the fall-off in favourable price perceptions it found was “much larger than ever before recorded”. 



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