The Surprising Benefits of Inflation Hitting a 39-Year High


Friday December 10, 2021

As strong consumer demand and supply shortages continue to pressure prices on everything from food, energy, and automobiles, the U.S. Labor Department reported inflation for the month of November at a 39-year high of 6.8%. Despite the high inflation rates we have witnessed over the past year, the main driver of inflation is a good thing, a strong economy with no lack of consumer demand.

The November employment report showed signs of continued growth in the labor market as well. 1.1 million more people were employed in November versus just one month ago driving the unemployment rate from 4.6% to 4.2%.

In the chart above you can see the surprising benefit of inflation on corporate margins. Removing the market capitalization bias from the S&P 500, you can see in the above chart the equal-weighted average S&P 500 1-Year % Change in Revenues relative to Gross Margin, Operating Margin (EBIT), and Net Margin.

Revenue TTM (1-Year % Change)

Inflation is driving annual revenue growth for the S&P 500 to post Great Recession recovery period highs of ~15%. Corporations are being forced to increase prices on finished goods and services as demand increases alongside input costs. We are keeping our eyes on the 25-year high Revenue % Change of 18.6% set back in 2000 as an indicator that corporations are running out of room to pass input cost increases along to consumers. Should this happen, we would expect 1-Year % Change in Revenue Growth to roll over and drive all levels of profit margins lower over time.

Gross Margin TTM

Trailing 12-month S&P 500 Gross Margin remains on a positively sloped trajectory that started during the Great Recession recovery era. This is a positive sign that U.S. multinational corporations can increase prices at a rate greater than their own input cost increases. This margin efficiency at the ‘Gross’ level will translate to additional Operating Margin and Net Margin efficiency driving additional EPS growth through margin expansion.

EBIT Margin TTM (Operating Margin)

The recovery in the trailing 12-month S&P 500 Operating Margin has exceeded pre-Covid highs. U.S. multinational corporations have been able to continue to carve costs out of their businesses driven primarily through efficiencies in SG&A and R&D expenses. This margin efficiency at the ‘Operating’ level will translate to additional Net Margin efficiency driving additional EPS growth through margin expansion.

In summary, despite the frightening, 39-year high inflation numbers, we believe that this is part of a normal market recovery given the vast amounts of liquidity in the system. We believe that equity markets will continue to climb the ‘wall of worry throughout 2022’ and we remain optimistic overall for the equity markets in 2022.


Published December 13, 2021

Joe Maas, CIO | CFA, CFP®, ChFC, CLU®, MSFS, CVA, ABAR, CM&AA, CCIM
David Stryzewski, CEO |
CSA, NSSA


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