What is inflation? At its base, inflation is rising prices. From a company’s perspective, rising prices can be a good thing. Sales, after all, are prices times the number of widgets sold. If the number of widgets sold remains the same—a big if!—rising prices mean higher sales. In fact, many companies grow earnings just this way, by slowly raising prices over time. Revenue management is a dance between raising prices and maintaining demand, and inflation can actually make it easier to raise prices. If demand is strong, as it is right now, companies can raise prices—and sales—without hurting demand. And that is what we are seeing.
But, generally, expenses don’t increase at the same rate as sales. Some expenses do, of course, but costs like rent, supply contracts, wages, and equipment are typically contracted over one-year to multiyear periods. Because a significant part of a company’s costs are typically sticky, expenses will increase more slowly than revenues. Eventually, costs will catch up, but for a while the company’s revenues will go up faster than the expenses.
