The month of October is when most companies listed on the stock exchange report their quarterly results, for the quarter ending September. The good news is that corporate profitability, at least of the large ones, is improving dramatically. This is true for companies across sectors like fast-moving consumer goods (i.e., foods and staples), white goods like washing machines and toasters, home furnishing and improvement, fashion, and even commodity sectors like metals, cement, construction materials, chemicals.
The automotive sector is perking up, although the demand for the high-end vehicles is rising more steeply whereas for two-wheelers, it is slow. This reflects the K-shaped recovery. The upper leg of the K signifies goods and services consumed by the higher income, urban bracket, and the lower leg of the K signifies lower-income households and rural areas. The upper leg of the K is also representative of the segment of the population which has hugely benefited from the rise in stock market wealth.
All this surging demand is prior to the next quarter, which is when the festival buying push will be truly felt. If indeed the economic momentum is good, then even this Diwali and Christmas quarter should fetch good profitability.
Cause for concern
But there is a looming worry. And that was expressed by many company officials reporting their handsome profits of the quarter ending September. The telling remarks were by the chairman and managing director of Hindustan Unilever, which is a leading manufacturer of all sorts of consumer goods: soaps, oils, skin care and food products. He warned that the pace of input cost escalation is the steepest in more than a decade. This sentiment is echoed by many other companies too.
The input cost escalation is best captured by the Wholesale Price Index (WPI)-based inflation, which has been running in double digits for several months. It includes the energy and logistics costs (of oil, petrol, diesel, coal), of raw materials including metals and chemicals, and of costs imposed by supply-chain disruptions which are being felt globally. The gap between the consumer (CPI) and WPI-based inflation is too wide, and is bound to narrow. Which means consumer price inflation will surely rise.
Global food price index
Indeed, the RBI itself is unsure of reaching its own target of consumer inflation of four per cent before 2023. America is experiencing record consumer inflation of about 5.5 per cent, and so is Europe. The cost of gas used for home heating in the winter, and also oil, has spiked up. The Food and Agricultural Organization says that the global food price index is the highest in the past seven years. The Bloomberg commodity price index, which captures energy, metals, fibres and chemicals has also risen sharply. Ocean freight costs are still very high and will persist. All of these are called ‘input costs’ but sooner or later, will feed into consumer inflation.
To add to input cost pressure, are high fiscal deficits which need higher taxes (such as on petrol and diesel in India), which can only aggravate inflation. A good agriculture harvest cannot offset these high costs. Inflation can suddenly spike up like the second wave of Covid. It does not rise steadily and predictably. And if we get into a wage cost spiral (the government has already revised the DA rates), then putting the inflation genie back into the bottle might not be easy. Inflation fears have already made stock markets somewhat nervous.
The writer is an economist and Senior Fellow, Takshashila Institution
The Billion Press
