We Should All Cheer the Return of Company Profits

Trying to forecast inflation is a hazardous occupation when there's so much volatility in markets, supply chains and energy prices. But we can get some sense of where inflation is likely to go by tracking the profit margins of companies that make goods and services that go into the consumer prices basket. Back in February , when I first raised this idea, profit margins were getting squeezed as companies absorbed cost increases because prices for commodities, labor and freight were rising faster than they could be passed along to customers.

Conditions have changed over the course of the year. As General Mills showed in last week's quarterly earnings report, companies that were hit hardest by higher costs have made progress on stabilizing profit margins, creating a pathway towards more normalized inflation at places like the grocery store over the coming months.

The way to think about this is by looking at companies that make products like cereal, ketchup and bleach as middlemen between providers of raw materials, labor and transportation services on one side of a transaction, and consumers on the other. In normal times when things are stable, if their costs go up a little, they increase prices a little and they make their profit — textbook capitalism stuff.