This is what a profit margin squeeze looks like
Two inflation indexes out this week, taken together, show how companies’ margins are getting squeezed.
Why it matters: Corporate earnings growth, while still historically high, is receding from record second-quarter levels. Margins will be a huge focus during Q3 earnings calls this month.
The big picture: Prices that consumers pay for goods and services have been rising this year, but wholesale prices have risen faster, shrinking the rate of profits that some companies make off their revenue.
- The alternative, of course, is that consumers shoulder all of the rising costs.
Details: The Consumer Price Index grew 0.5% in September, while its wholesale companion, the Producer Price Index, grew by 0.7%.
- The total PPI reading has outweighed the headline CPI every month this year.
The bottom line: Expect more price hikes to flow through to consumers.
- “We're going to find out in the coming months what kind of pricing power [companies] have. It's going to impact profitability if they don't raise prices more,” Tony Roth, CIO at Wilmington Trust, tells Axios.