TS Lombard with the note:
- Not all inflation periods are created equal: when inflation is “demand-pull”(pro-cyclical), corporates are able to pass on PPI increases to customers.
- Historically, margins improve when inflation is pro-cyclical and contract when it is counter-cyclical.
- The current regime is pro-cyclical; we remain positive on margins and equities.
Rising input costs do not necessarily mean weaker corporate profitability. Producer prices have been surging globally: the US PPI now stands at a record 8.6% YoY. Recent market headlines have focused on the risk posed by these rising input costs to margins and thus equity prices. While this has certainly been a threat at times (e.g.,in the late 1970s and early 1980s), it is not always the case. Whether margins are eroded depends on the ability of firms to pass on rising input costs to their customers.
