October is when most publicly traded companies publish their quarterly results, for the quarter ending in September. The good news is that the profitability of companies, at least of the larger ones, is improving dramatically. This is true for companies in all industries such as fast moving consumer goods (ie.

The automotive sector is recovering, although the demand for high-end vehicles is increasing more strongly, while for two-wheelers it is slow. This reflects the K-shaped recovery. The upper part of the K signifies the goods and services consumed by the highest incomes, the urban slice, and the lower part of the K signifies low-income households and rural areas. The upper branch of K is also representative of the fringe of the population which has benefited greatly from the rise in stock market wealth.

All of this growing demand predates the next quarter when the festival’s buying push will really kick in. If indeed the economic dynamic is good, then even this district of Diwali and Christmas should generate good profitability.

Source of concern

But there is a concern looming. And that was voiced by many company officials reporting their fine earnings for the quarter ending in September. The revealing remarks were made by the chairman and CEO of Hindustan Unilever, which is a leading manufacturer of all kinds of consumer goods: soaps, oils, skin care and food products. He warned that the pace of escalating input costs is the fastest in more than a decade. This sentiment is also shared by many other companies.

Escalating input costs are best captured by inflation based on the Wholesale Price Index (WPI), which has been in double digits for several months. It includes energy and logistics costs (oil, gasoline, diesel, coal), raw materials, including metals and chemicals, and costs imposed by supply chain disruptions that are felt globally. The gap between consumer inflation (CPI) and WPI-based inflation is too wide and is expected to narrow. Which means that consumer price inflation will surely increase.

World Food Price Index

Indeed, the RBI itself is not sure it will meet its own consumer inflation target of 4% before 2023. America is experiencing record consumer inflation of around 5.5%, while like Europe. The cost of gas used to heat the house in the winter, as well as fuel oil, has skyrocketed. The Food and Agriculture Organization says the world food price index is the highest in seven years. The Bloomberg commodity price index, which includes energy, metals, fibers and chemicals, also rose sharply. Ocean freight costs are still very high and will persist. All of these are called “input costs”, but sooner or later they will fuel consumer inflation.

Added to the pressure on input costs are high budget deficits that require higher taxes (like on gasoline and diesel in India), which can only worsen inflation. A good agricultural harvest cannot compensate for these high costs. Inflation can suddenly rise like the second wave of Covid. It does not increase steadily and predictably. And if we get into a wage cost spiral (the government has already revised DA rates) then putting the inflation genius back in the bottle may not be easy. Inflationary fears have already made the stock markets somewhat nervous.

The author is an economist and senior researcher, Takshashila Institution

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Posted on: Monday, October 25, 2021, 2:30 a.m. IST