Something unusual is happening right now, and we want to make sure you see it clearly. Corporate profits in the second quarter of this year grew at something close to a 37 percent annual pace. Profits as a share of the whole economy sit at roughly 12 to 13 percent, which is an exceptionally high level by any historical measure. At the same time, real economic output grew at only about 1.5 percent annualized. Those two facts are sitting in the same quarter, and they are both true.

Most people look at profit numbers and assume the economy is ripping. Most people look at growth numbers that slow and assume companies must be hurting. Right now, neither instinct is quite right. What is actually happening is more interesting, and more important for how you think about the next twelve months.

How you get rich growth and slow output at the same time

The answer runs through prices. The overall price level for the economy grew at roughly a 6 percent annual pace in the second quarter. That means businesses collected a lot more dollars for roughly the same amount of stuff sold. Revenue in nominal terms, meaning actual dollars before you adjust for inflation, ran hot. Costs, particularly wages, grew far more slowly. Compensation across the economy rose at about a 3.7 percent annual pace, well below the pace of nominal output. The gap between what companies charged and what they paid their people widened sharply.

That gap is profits. When prices rise faster than costs, margins expand even if unit volume barely moves. It is a math identity more than a business story. The economy did not suddenly get more productive. It got more inflationary in a lopsided way, and the gains landed disproportionately in the profit column rather than the paycheck column.

A large share of that price surge came from energy. The Straits of Hormuz have been effectively closed to large tankers since Iran moved to restrict passage. The Bab Al-Mandab strait, through which Saudi crude travels toward Europe and Asia, has been disrupted by attacks on tankers. Together, these two chokepoints took millions of barrels per day off the accessible market. Energy prices in the second quarter ran at an annualized pace that was extraordinary. The ripple hit everything from manufacturing input costs to transportation to the price of diesel at the pump.

The thing worth understanding is that energy-driven inflation is deeply uneven. It taxes households and businesses that consume energy. It rewards producers. And in national accounting, it inflates nominal revenues across entire sectors while real volume stays flat or even dips. That is a big part of why profits look so strong and the real economy looks sluggish at the same time.

For what it is worth, the most recent monthly reading on consumer prices measured by the Fed’s preferred gauge, which covers personal consumption expenditures, showed headline inflation running at a negative pace for June on an annualized basis. Core prices, stripping out food and energy, ran at about 1.6 percent annualized for the same month. That is a single data point and we would not build a story on one month. But it suggests the worst of the energy spike may be working through the system, not accelerating further.