Record profits show inflation provided cover to boost earnings numbers

The result has been a much heavier cost burden for households paying more for basic necessities, not to mention higher mortgage rates, after central banks hiked rates to contain inflation.

But inflation hasn’t necessarily been bad for everyone. In fact, many large companies have reaped unexpected profits as a result, and passed on higher energy and raw material costs to ordinary consumers. In fact, inflation has been a boon for several industries — not just energy, but also some companies in food, construction and packaging.

This week it was Shell that caught the public eye. The oil giant announced record annual profits of nearly $40 billion for 2022, a year when many ordinary people worried they might not be able to keep cars running and homes warm. It’s not just the announcement of huge wins.

Because the high prices at the checkout and pump are not forces of nature. They are the result of boardroom decisions to use inflation as a cover for margin-enhancing price hikes.

The extra profits then flow into dividends and buybacks, which have been eagerly embraced by investors in a year when stock prices have struggled severely.

If you’ve recently paid for food, gas, or even beer, you’ll understand half of this equation.

Grab the iconic pint of Guinness. Diageo kicked off Dry January with a 12-cent increase in the price it charges pub owners for the popular stout and other beers it brews.

The price increase comes at an already challenging time for restaurateurs, who have been struggling with a sluggish recovery from Covid in the hospitality sector, as well as rising energy bills and higher wage bills.

The 9 percent special tax rate for hospitality is also to be abolished at the end of February. In addition, Diageo’s price hike followed an earlier price hike by competitor Heineken in December.

Obviously, these cost increases will have to be borne by customers, as restaurateurs probably don’t have the margin to absorb them right now.

But what about Diageo? Well, just last week the beer and spirits group released its interim results for the second half of 2022. Sales rose 18.4 percent to £9.4 billion over the period.

About half of this came from a favorable exchange rate due to the stronger US dollar, but the other half mainly from price increases.

In fact, the company said price increases “more than offset the impact of absolute cost inflation on gross margin.” In other words, Diageo managed to inflate prices beyond its own increased expenses and boost profitability during a cost-of-living crisis.

The company is now returning an additional £500m to shareholders in a new round of share buybacks.

OK, but how much of the typical household budget is spent on pints? The Guinness Prize may illustrate inflation-earnings dynamics, but it has a relatively small impact.

How about energy? People are getting whopping winter bills right now, reflecting the rise in gas and electricity prices over the last year. Although the rate of increase in energy prices has eased, data from the Central Statistics Office showed this week that they were still 33.1 percent higher in January than a year ago. But for all of 2022, they’re up 59.7 percent year-on-year, and that’s showing in your mailbox right now.

Airtricity owner SSE and Bord Gáis owner Centrica both upgraded their earnings forecasts last month as energy companies benefit from high energy prices caused by the Russian invasion of Ukraine.

Airtricity nearly doubled what it charged its gas and electricity customers in Ireland last year as wholesale prices soared due to supply shortages and sanctions.

Now SSE says earnings this year will be 25 percent higher than previously expected. The company’s interim profit in November was four times higher than a year earlier.

The company says it will take advantage of the windfall to invest in low-carbon energy projects, but shareholders have not been forgotten. They get a 5 percent increase in their dividend payments.

That kind of contrast — between staggering prices forced on consumers and whopping corporate profits — is easy to see when the product is simple and tangible, like beer, or inevitable, like energy.

But much of the inflation tends to hide in the less visible corners of the economy, whose items aren’t included in a typical shopping basket for statistical purposes.

A good example is the Irish packaging group Smurfit Kappa. The company manufactures cartons, which are a critical part of commercial infrastructure in our same-day, on-demand delivery economy.

But raw material prices to make these boxes skyrocketed during and after the pandemic. However, Smurfit Kappa aggressively and consistently raised prices to recoup costs. Earlier last year, the company had surpassed its record pre-Covid profits and forecast further developments.

While most of us aren’t frequent box buyers per se, almost everything we buy comes in a box, so there’s no escaping the price pass-on that Smurfit Kappa has achieved. Unless, of course, you are a shareholder, then the money will flow back to you.