One reason that equity markets have welcomed the increase is that higher US real yields reflect higher growth expectations, and the rise in inflation should be reflected in higher nominal company earnings.
Do US companies have pricing power?
Whether inflation proves to be so benign will depend on whether companies are able to pass on higher input costs to consumers.
Intermediate goods costs have already been rising faster than the prices of finished goods, increasing the pressure on the margins of US companies further.
Owing to the pandemic, companies had already seen gross margins fall over the course of last year from 32.2% to 31.4% (see Exhibit 1).
We do not, however, see a significant risk on this front. As the US economy continues to reopen, consumers will likely be more tolerant of paying higher prices for activities that had until now been suspended. Competition will also be limited as not every business will be able to resume trading. In fact, some companies might use the resumption to restore margins to at least pre-pandemic levels.
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.
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