Bumper profits show inflation gave cover to boost bottom lines

The result has been a much bigger cost burden for households, who are paying more for basic necessities, not to mention higher interest rates on mortgages now that central banks have increased rates to get price rises under control.

But inflation hasn’t necessarily been bad for everyone. In fact, many major corporations have enjoyed windfall profits as a result, passing higher energy and raw material costs on to ordinary consumers. In fact, inflation has been a boon to several industries – not just energy, but some companies in food, construction and packaging, too.

This week it was Shell that caught public attention. The oil giant announced a record annual profit of almost $40bn for 2022, a year when many ordinary people fretted they might not be able to keep cars running and homes warm. It’s not alone announcing huge profits.

That’s because those high prices you’ve been paying at the till and the pump aren’t acts of nature. They are the result of decisions made in board rooms to use inflation as cover for margin-fattening price hikes.

The extra profits then go to dividends and buybacks, which in a year when share prices struggled mightily, have been eagerly received by investors.

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

Take the iconic pint of Guinness. Diageo kicked off Dry January with a 12 cent increase on the price it charges publicans for the popular stout and other beers it brews.

The price increase arrived during an already challenging period for publicans, who were contending with a sluggish recovery from Covid in the hospitality sector, alongside soaring energy costs and bigger wage bills.

The 9pc special hospitality Vat rate is also due to be axed at the end of February. Moreover, the Diageo price increase followed an earlier one from rival Heineken in December.

Obviously, those cost increases will have to be borne by customers, as publicans probably don’t have the margin to absorb it right now.

But what about Diageo? Well, just last week the beer and spirits group published its interim results for the back half of 2022. Sales increased 18.4pc in the period to £9.4bn.

About half of that figure came from a favourable exchange rate due to the strengthening US dollar, but the other half was mostly from price increases.

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

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

OK, but how much of the typical household budget goes on pints? The price of Guinness may be illustrative of the inflation-profit dynamic, but it’s relatively low impact.

How about energy? People are getting whopper winter bills right now reflecting the surge in gas and electricity prices in the last year. Even though the rate of increase in energy prices has calmed, Central Statistics Office data this week showed they were still 33.1pc higher in January than a year ago. But over the whole of 2022 they are 59.7pc up on the prior year, and that’s what is showing up in your postbox right now.

SSE, the owner of Airtricity, and Bord Gáis owner Centrica both raised their profit forecasts last month as power companies reap the benefit of high energy prices caused by Russia’s invasion of Ukraine.

Airtricity nearly doubled what it was charging its gas and electricity customers in Ireland last year as wholesale prices went vertical due to supply shocks and sanctions.

Now SSE is saying profits this year will be 25pc higher than previously expected. The company’s interim profits in November were four times higher than the previous year.

The company says it will use the windfall to invest in low-carbon energy projects, but shareholders haven’t been forgotten. They’re getting a 5pc bump in their dividend payments.

This kind of contrast – between eye-watering prices foisted on consumers and chunky profits by corporations – is easy to spot when the product is simple and tangible, like beer, or unavoidable, like energy.

But a lot of inflation coat-tailing is more hidden in the less visible corners of the economy whose items aren’t included in a typical basket of goods for statistical purposes.

Irish packaging group Smurfit Kappa is a great example. The company makes boxes which, in our on-demand same-day delivery economy, are a key part of commercial infrastructure.

But the price of raw materials to make those boxes soared during and after the pandemic. Smurfit Kappa, however, aggressively and consistently hiked prices to recover costs. By early last year, the company had exceeded its record pre-Covid profit levels and was forecasting more to come.

While most of us aren’t frequent buyers of boxes per se, almost everything we buy comes in one, so there is no escaping the price pass-through that Smurfit Kappa has achieved. Unless, of course, you’re a shareholder, in which case the money flows back to you.

Yet there is a limit to how much companies can manage to shift onto their customers before margins start to erode.

Irish housebuilders Cairn and Glenveagh are both contending with this problem. As early as last March, Cairn CEO Michael Stanley warned that new buyers could be priced out if inflation wasn’t brought under control.

“If build cost moves up too much, we won’t be able to find customers who can afford our starter homes,” he said.

“There is no super-normal profit there to absorb the cost increases. Eventually it will wind up in the price.”

Glenveagh saw its margins on urban apartments come down slightly by mid-year 2022, although they remained strong at 16.5pc – above the “normal” level of 15pc.

As we make our way through what investors call “earnings season”, there are going to be a lot more announcements about widening margins due to price rises.

With inflation now cooling, the window may be closing for companies to take advantage. But the impact on consumers will last for a while yet.