“We’re seeing this expansion of margin under the cover of, ‘Oh, it’s a general inflation problem, we can’t help it,’ Paul Donovan of UBS said Thursday.
“We’re seeing this expansion of margin under the cover of, ‘Oh, it’s a general inflation problem, we can’t help it,’ Paul Donovan of UBS said Thursday.
Because that is how inflation works. If it helps here’s an example using the big Mac index.
Say pre inflation, I make enough profit to buy 5 big Macs. After inflation, my profit is now only enough to buy 4. In real terms, my profit has gone down, if I don’t increase it proportionally to inflation. Thus, by keeping profits to only $20, profits would have decreased in reality (just like the example of the worker bee below when their pay doesn’t increase proportionally with inflation).
Of course, this is a very simplistic view where inflation is the only factor. There may be other pressures that would make it difficult for a company to raise their prices to maintain the same profit ratios, i.e. supply/demand constraints.
The general point is with inflation, the raw numbers of everything increases. If you see a report about record profits, but they are only speaking in $ terms, don’t assume it is price gouging. There isn’t enough info given either way, and it is important to avoid falling into the trap of using incomplete data to confirm your biases.