Why Is Inflation So Sticky? It Could Be Corporate Profits | Kanebridge News
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Why Is Inflation So Sticky? It Could Be Corporate Profits

Some companies might have been raising prices faster than their costs have increased

By PAUL HANNON
Wed, May 3, 2023 8:25amGrey Clock 4 min

Inflation has proved more stubborn than central banks bargained for when prices started surging two years ago. Now some economists think they know why: Businesses are using a rare opportunity to boost their profit margins.

Figures released Tuesday by the European Union’s statistics agency showed consumer prices in the eurozone were 7.0% higher than a year earlier in April, a pickup from March and more than three times the European Central Bank’s target. However, the core rate of inflation—which excludes food and energy prices—edged down to 5.6% in April from a record high of 5.7% in March.

Inflation rates also remain uncomfortably high in the U.S. and many other parts of the world despite interest-rate rises that have gone further and been delivered more quickly than at any time since the 1980s.

There have been good reasons for businesses to raise their prices in recent months. The supply-chain disruptions caused by the Covid-19 pandemic and the energy, food and raw-material bottlenecks that followed Russia’s invasion of Ukraine have pushed costs higher.

But there are signs that companies are doing more than covering their costs.

According to economists at the ECB, businesses have been padding their profits. That, they said, was a bigger factor in fuelling inflation during the second half of last year than rising wages were.

Jan Philipp Jenisch, chief executive of construction-materials maker Holcim, said on a recent earnings call: “We are in that inflationary environment already for almost two years now…We have done the pricing in a very proactive way, so that our results aren’t suffering. On the contrary, they are improving the margins.”

One puzzle is why consumers have played ball. Usually, economists would expect any business that raised its prices to lose customers to competitors that don’t, or not by as much.

But these aren’t normal times. In rare situations—such as an economy’s reopening after a pandemic—widespread knowledge that costs are rising allows businesses to raise their prices knowing that their competitors will act in the same way, according to a paper by Isabella Weber, assistant professor of economics at the University of Massachusetts, Amherst, and her colleague, Evan Wasner.

That is a pattern the two economists said has played out in an analysis of recent earning calls in which executives at U.S. businesses present their financial results to analysts.

“We do have to think about pricing differently,” said Ms. Weber. “A cost shock, or bottlenecks can create an implicit agreement among firms that raise their prices, so they can expect others to act likewise.”

Consumers have also been unusually willing to accept higher prices lately. Paul Donovan, chief economist at UBS Global Wealth Management, said businesses are betting that consumers will go along because they know about supply bottlenecks and higher energy prices.

“They are confident that they can convince consumers that it isn’t their fault, and it won’t damage their brand,” Mr. Donovan said.

The latest round of earning calls by large consumer-facing companies underlined that. Food and health company Nestlé last week said it had boosted sales by 5.6% in the first three months of the year despite raising its prices by 9.8%—its CEO said the company was simply matching cost increases over the previous two years.

“We’re still in the process of catching up with some of the hits we’ve taken,” said Mark Schneider in a call with analysts.

Elsewhere, the desire to boost margins, rather than just cover increased costs, appears to be one reason why food prices have continued to rise rapidly in Europe.

Much of the surge in food prices since the middle of last year stems from higher costs, particularly for energy, since most food production is quite energy-intensive. But economists at insurance company Allianz have calculated that about 10% of the rise reflects the search for higher profits. They suggest that is possible because key parts of the food-supply chain are dominated by a small number of firms.

“There is not enough competition in the food sector, especially in distribution,” said Ludovic Subran, chief economist at Allianz.

Not all businesses are opportunistically boosting their margins and Ms. Weber said that when some do, it can cause problems for others that are closer to the final consumer and are at greatest risk of facing a backlash.

Over recent months, Germany’s largest retailer, Edeka, has complained about the pricing behaviour of its suppliers of branded goods and has stopped stocking some of their products.

“We call on the branded-products industry to live up to its responsibility and stop artificially driving up inflation,” said Edeka’s CEO Markus Mosa.

There are some signs that food-price inflation is starting to slow. In France, food prices were 14.9% higher in April than a year earlier, a slowdown from 15.9% in March. In Germany, food inflation slowed to 17.2% from 22.3%. But the British Retail Consortium, a group that represents U.K. stores, said food inflation accelerated in April to hit a record high.

In recent earnings calls, some executives said consumers were becoming more resistant to price rises.

“We will probably see pricing moving down,” said Francois-Xavier Roger, Nestlé’s chief financial officer.

Last month, Procter & Gamble said it had boosted its profit margins in the first three months of the year, thanks in large part to higher prices. It warned that there were limits to how far it could push that tactic before consumers switched to cheaper alternatives.

“We’ve made several adjustments to price gaps, not just versus private label, but versus branded competition as we’ve gone through this period of pricing, and we need to continue to be sensitive to that,” said Jon Moeller, the company’s CEO.

For Mr. Donovan at UBS, the period of profit-driven inflation might be coming to an end, in part because of rising public scrutiny.

“We are probably at a point where companies may be reassessing whether to push this,” he said. “A reputation for being poor value for money stays for a long time.”



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AACCI’s Strategic Vision for Enhancing Australia-Arab Trade Relations

The Australian Arab Chamber of Commerce & Industry (AACCI) is fostering robust trade relations between Australia and Arab countries.

Mon, May 20, 2024 5 min

In an era where global trade and international relationships are more crucial than ever, the Australia Arab Chamber of Commerce & Industry (AACCI) serves as a bridge, for cooperation and growth between Australia and the Arab nations. Led by its Chairman, Mr. Mohamed Hage, the AACCI has taken on projects aimed at strengthening relationships and fostering development across borders.

This exclusive interview explores the initiatives implemented by the AACCI to expand its presence and influence in the region including the significant establishment of a new operational hub in Dubai. We also delve into how the Chamber embraces education through training and research, its participation in major international exhibitions, and its active support for both large corporations and small businesses.

Looking towards tomorrow, Mr. Mohamed shares his vision for broadening AACCI’s reach emphasizing the importance of the on-ground operations and cultural understanding in building business connections.

-Could you elaborate on the Australia Arab Chamber of Commerce & Industry, including its objectives and main areas of focus?

The Australia Arab Chamber of Commerce & Industry (AACCI) plays a fundamental role, in promoting business partnerships and trade between Australia and the 22 Arab countries. As a member of the Union of Arab Chambers affiliated with the Arab League, AACCI focuses on strengthening trade and investment ties, across these countries.

To nurture these connections effectively AACCI has outlined four objectives: facilitating trade and investment activities, certifying documents, educating stakeholders, and offering marketing assistance.

Our initiatives are designed not only to empower trade and investment endeavors but to also ensure engagement with specific sectors that drive these activities. With an understanding of the characteristics, strengths and preferences of each country, AACCI prides itself on its specialized knowledge customized to suit the distinct business environments of these nations.

– As the AACCI approaches its 50th anniversary, what have been some of the key milestones and achievements?

I believe one of AACCI’s accomplishments is the opportunities it has opened up for numerous Australian companies to access markets, in the region. Moreover, the strong bilateral trade relationship that has developed between Australia and the 22 Arab nations over the five decades has led to trade transactions amounting to billions of dollars.

This extensive trade covers industries such as food and beverages, luxury hotels and many more services. Each successive generation, within AACCI has built upon the foundation laid by its predecessors enriching their knowledge base and expanding their range of services.

– How does the AACCI leverage its diverse leadership team to enhance trade and investment opportunities between Australia and the Arab region?

Since taking on the role of chairman, my main focus has been on expanding our presence in the region. This led to the idea of opening an office in Dubai, which symbolizes our dedication to deepening our engagement in that area. We have successfully secured the license to open our first office in Dubai after 50 years, which will serve as a gateway to the GCC and North Africa.

I strongly believe that building two-way trade and investment ties requires more than a degree of business connectivity; it demands having local representatives present in each region. With trends emphasizing strategies the value of face-to-face engagements cannot be overstated.

Setting up offices in the region is essential for the Chamber to truly serve as a link and support system for business activities. Ultimately this expansion will bring benefits to our members and partners by providing them with access, to dynamic markets and diverse prospects.

– Can you discuss the significance of AACCI’s role in cultural and business exchanges between the two regions?

The importance of understanding cultures in our operations cannot be overstated. To address this, we have included a training platform within the Chamber to strengthen our cultural awareness initiatives. This new program offers our members access to modules on our website focusing on global business practices.

Furthermore, we have set up a Center of Excellence specifically dedicated to researching areas like food security and cultural awareness. These research endeavors are essential for promoting knowledge between the two regions.

By combining the resources of the Center of Excellence, our training resources, and the forthcoming local office in Dubai, we’re providing cultural awareness not only in the region but also in Australia. This approach ensures that our members are well equipped and knowledgeable boosting their effectiveness and involvement, in markets.

– What is the objective of your on-ground presence at conferences and events?

Participating in conferences and on ground events is very important for increasing awareness in industries like construction where knowledge of opportunities in the Arab world may not be widespread. When we see projects such as NEOM or notice the construction boom happening in the region it becomes important for organizations like the Chamber of Commerce to highlight these prospects. By taking part in large scale expos such as the Sydney Build Expo we position ourselves at the forefront of these advancements.

Our presence at these events enables interaction giving entrepreneurs a chance to visit our booth engage in discussions and learn more about the region in an approachable and personalized manner. This plays a role in simplifying the process and making opportunities concrete.

– With such a diverse membership base, how does AACCI tailor its services to meet the needs of both large corporations and small startups?

When it comes to discussing business it’s important to grasp how influence and vision come into play. Businesses looking to expand are often motivated by a desire to achieve something whether they are big companies or small enterprises. Small businesses typically aim to raise their brands profile while larger corporations seek recognition and market dominance.

Standing out in this area can be tough mainly because the key driving force is the passion to showcase the brand and products on a platform. This determination serves as a motivator for entrepreneurs.

At the Chamber we make a point of recognizing the needs of both big and small players by understanding each members individual situation. We ensure that every member is well informed about the opportunities and risks that come with expanding. For small businesses, this means being aware of the financial demands, while large businesses are advised on the necessity of both financial and emotional resilience.

– How does AACCI plan to expand or evolve its services in the coming years to further support its members?

The importance of having resources on the ground cannot be emphasized enough. Having local staff is key to establishing connections with the communities we serve. Without a presence in the area staying updated on events and activities becomes quite challenging.

This is why, as I’ve mentioned before, we have established an office in Dubai, staffed with personnel dedicated to supporting our members. This local office will help us effectively bridge the gap between Australia and the Arab world. And our members will benefit from insights and assistance from someone who truly knows the landscape.

In Australia we have equipped offices throughout the country staffed by individuals who play a significant role in our operations. This strong domestic network complements our efforts ensuring that we provide support to our members both locally and globally. This strategic approach is crucial, for nurturing business relationships and fostering continental understanding.

 

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