How inflation will affect Apple

An employee arranges Apple iPhones as customer shop at an Apple store.

Mike Segar | Reuters

The last time Apple faced an inflationary environment like this, it had been a public company for less than a year and its best-selling product was the Apple II home computer.

In May, the annual inflation rate in the U.S. was 8.6%, the highest level since 1981. Other major markets for Apple sales are seeing similar or even higher levels of inflation.

Apple faces increasing costs from global logistics and rising employee salaries, as well the possibility that consumers will put off their iPhone upgrades because of declining purchasing power. Apple is also facing supply constraints related to the China shutdowns this year that could result in an $8 billion revenue hit.

Many firms, especially those with pricing power, can pass increased costs onto their customers by raising prices, particularly if demand is strong. Apple hasn’t raised prices for iPhones in the U.S., but regularly tweaks pricing around the world in response to currency fluctuations. Some years, Apple has changed its product pricing structure for its slate of new devices in the fall.

Apple could also eat some of the costs, taking a hit to its margins, while keeping prices stable to avoid denting demand.

“From an inflation point of view, we are seeing inflation,” Apple CEO Tim Cook told investors on an earnings call in April. “It is or was evident in our gross margin last quarter and in our OpEx last quarter and it is assumed in the guidance that [CFO] Luca [Maestri] gave for this quarter as well. So we’re definitely seeing some level of inflation that I think everybody is seeing.”

Rising costs

Cook said there are at least two places where inflation is showing up on the company’s balance sheet: gross margins and operating expenditures.

Apple’s gross margin for the quarter was 43.7%, higher than analysts’ expectations, but down very slightly from the December quarter, which was the highest since 2012, according to FactSet data.

Apple’s margin will go down in the June quarter, landing between 42% and 43%, Maestri said. But Apple’s margins expanded during the pandemic and they are still at elevated levels on a historical basis.