Facing the worst price increases in more than 30 years, U.S. companies have so far found ways to cope. As of early this month, 76% of S&P 500 companies beat earnings per share expectations for the fourth quarter of 2021, in line with the five-year average, according to FactSet.

However, several chief financial officers said in recent earnings calls that many companies still face the risk of being "burned" by inflation, at least in the first half of 2022. They are trying to maintain profits through price increases, cost cuts, productivity improvements, and hedging against future price increases.

"Inflationary pressures are broad-based and show little sign of easing in the near term," Procter & Gamble CFO Andre Schulten told analysts on the company's Jan. 19 quarterly earnings call. "Transportation and labor markets remain tight, and raw material supply in some categories and markets remains constrained," he added. Schulten warned that the company expects to face about $2.3 billion in after-tax commodity cost headwinds in fiscal 2022.

The producer price index, which measures what suppliers charge businesses, surged 9.7% last year. Meanwhile, consumer purchasing power declined, with the consumer price index rising 7%, outpacing the 4.9% increase in average hourly earnings.

General Electric CEO Lawrence Culp said on the Jan. 25 fourth-quarter earnings call that rising costs have created "the toughest operating environment in decades." ConocoPhillips CEO Ryan Lance noted on a Feb. 4 call that commodity prices have accelerated over the past 90 to 120 days, with particularly notable increases in chemicals, oil country tubular goods, transportation, and labor costs.

"Inflation has now moved downstream; you see price increases in more places, not just upstream," 3M Chief Financial and Transformation Officer Monish Patolawala said on a Jan. 26 call. Higher raw material and logistics costs reduced 3M's operating margin by 80 basis points last year. Johnson & Johnson CFO Joseph Wolk noted on Jan. 25 that the company faces higher transportation, labor, and some commodity costs, particularly for inputs such as lubricants used in consumer products.

Wage inflation is also troubling several companies, including Amazon. "We indeed see costs exceeding $4 billion from inflationary pressures, productivity losses, and operational disruptions," Amazon CFO Brian Olsavsky said on a Feb. 3 call. "Inflation stems mainly from wage increases and incentives in operations, as well as price increases from third-party carriers supporting our fulfillment centers." Amazon CEO Andy Jassy said in a statement that inflation and cost pressures caused by the Omicron variant and tight labor market have continued into this year.

Companies are taking the following steps to reduce the heat of inflation:

Price increase strategies

Amazon plans to raise the annual fee for Prime membership by 17%, from $119 to $139, Olsavsky said, marking the first increase since 2018. Wolk expects to raise prices on many of Johnson & Johnson's consumer health products this year; Culp said GE is "making sure we push price where we can." Last year, "the price-to-cost ratio was slightly negative for us, and looking at 2022, we expect a similar situation," Culp said.

P&G announced price increases across all 10 product categories in the U.S., covering hair care, home care, baby care, and adult incontinence products, Schulten said. The company also notified retailers that it will raise prices on Tide, Gain, Bounce, and other laundry products starting Feb. 28. "We expect price to be a larger contributor to sales growth in the second half of the fiscal year (ending June 30) as more price increases take effect in the market," he said.

Trane Technologies raised prices three times on most of its products last year, "achieving positive price/cost for the full year," CFO Chris Kuehn said on a Jan. 31 call. "We were ahead of the competition in the timing of price increases." However, Kuehn said Trane's price-to-cost ratio could turn negative in the first half of 2022, and "we will remain flexible throughout the year," continuously monitoring inflation. 3M's fourth-quarter price increases were 260 basis points higher than in the same period in 2020. "Year-over-year selling price increases offset fourth-quarter raw material and logistics cost inflation, adding 3 cents to earnings. Pricing will continue to be a tailwind in 2022," Patolawala said.

Improving productivity

P&G is seeking cost savings this year through productivity improvements, Schulten said. Raytheon Technologies plans to "find efficiency gains in our factories so that we can offset ongoing wage pressure with productivity," CEO Greg Hayes said on a Jan. 25 call. The company expects unexpected inflation in the supply chain to bring about $150 million in price pressure this year. Otis Worldwide offset most of the $35 million in commodity inflation in the fourth quarter by simplifying product installation processes, CFO Rahul Ghai said on a Jan. 31 call. Otis plans to offset "$90 million in commodity headwinds" through productivity improvements, Ghai noted, with price increases and higher demand providing tailwinds.

Cutting costs

Exxon Mobil plans to cut costs by $2 billion each this year and in 2023, CEO Darren Woods said on a Feb. 1 call. When negotiating contracts last year, the company tried to curb cost increases, "which is now paying off." GE "restructured" its procurement team to control costs, Culp said: "We are working as smartly as we can with suppliers to get the best combination of quality, delivery, and cost."

Hedging

Trane hedges copper and aluminum to smooth price fluctuations over 12 months, Kuehn said: "Entering any quarter, about 70% to 75% of our prices are hedged." Trane also buffers against steel price increases. "There's a six-month lag from locking in steel prices to seeing price changes," he said. "So any dynamics in steel in January won't actually show up until the second half." Looking ahead, Trane expects first-quarter inflation intensity to be roughly similar to the previous quarter, but to ease in the second half of 2022, Kuehn said: "Our best view is that price/cost could be negative in the first half, then recover strongly in the second half with high leverage."

3M predicted a similar inflation path. "I think 2022 will be more difficult on inflation in the first half than the second half," Patolawala said, noting the impact of labor supply, port congestion, and air freight capacity on future prices. Many CFOs' inflation outlook aligns with Federal Reserve Chairman Jerome Powell, who predicted supply chain bottlenecks would clear by summer and price increases would moderate. Powell and his central bank colleagues aim to curb inflation. In December, they signaled plans to reduce record monetary stimulus by raising the benchmark interest rate three times this year, with the first increase possibly coming after the next two-day meeting ending March 16.

P&G expects the price surge to be short-lived, Schulten said: "We believe this is a temporary profit trough that we can weather, rather than a reason to cut investment in the business." He added that consumers with reduced purchasing power can continue to choose P&G by buying lower-priced products within the same category. Take diapers, for example: "Think about diapers: you can buy Luvs at 15 cents each, Swaddlers at 30 cents, or Pure at 38 cents," Schulten said. "This is broadly applicable across all our categories and brands—meaning consumers have choices within our portfolio."