Decreasing inflation, decreasing margins?
This question, which is central to macro- and microeconomics in the medium term, may seem trivial and/or paradoxical, depending on the angle from which we consider inflation - on the output and/or input side.
Margins are in fact an increasing function of output prices, and a fall in output prices normally leads to a fall in margins, all things being equal.
Conversely, margins are a decreasing function of input prices, and a fall in input prices will a priori lead to an increase in margins, all things being equal.
At the macroeconomic level, the fact that the deceleration of consumer prices is now (almost) entirely due to decreasing commodity prices may add to the confusion and complicate the equation: if inflation continues to fall, how will margins evolve in 2023?
While one might have expected that the sharp rise in commodity prices over the past two years would have lowered corporate margins, the opposite has occurred: since the end of 2020, the margin rate of non-financial companies has risen by more than one point in the euro zone, while commodity prices have increased by more than 60% over the period (>100% for energy). Companies have thus gone far beyond simply passing on to their customers the rise in their input costs.
Beyond the sometimes opportunistic behavior of some companies, recent work by the ECB shows that higher unit profits were the main factor behind the acceleration of prices in the euro zone in 2022.
In a context of strong demand, companies have been able to favor margin strategies without (too much) fear of possible market share losses, transforming de facto part of the excess savings of households into pre-tax profits.
Of course, the situation is far from homogeneous: the macroeconomic observation of a general increase in margins should not obscure the fact that they have particularly increased in certain sectors and shifted to the value chains - according to the market power of the various players.
Read the full article, in french only, on the Lettre du Trésorier to learn more: