Corporate profits

Are record corporate profits the cause of inflation? Here’s what the experts think.

As soaring inflation weighed on budgets for essentials like gasoline and groceries, many big companies posted record profits, sparking anger among some ordinary citizens and public officials over price gouging.

Such frustration has recently come to the fore in the face of exorbitant gasoline prices. Earlier this month, President Joe Biden sent a letter to major oil refining companies accusing them of taking advantage of the market environment to reap profits as Americans struggle to afford gas.

The problem extends far beyond gas, according to progressives like Sen. Elizabeth Warren, D-Mass., and Sen. Jeff Merkley, D-Ore., Who supported an invoice last month it would give a federal agency and state attorneys general the power to enforce a ban on excessive price gouging.

But economists disagree on the role high corporate profits have played in driving inflation, as some say they account for more than half of the rise in prices while others say they have caused little or no upside.

Some who blame corporate pricing for some of the price increases said they were the result of market concentration that allows a handful of dominant firms in a given industry to raise prices without fear of competitors undermining them. with cheaper alternatives. But others doubt that explanation, noting that a major shift in corporate concentration is unlikely to occur in just a few years amid the pandemic.

The rift among economists is also partly explained by mixed assessments of whether corporate profits have fueled inflation or simply responded to it, as a global market rocked by supply and demand shocks induced pandemic has created a favorable environment for many companies to raise their prices.

“It’s a very intense time for people and their wallets – I understand why these debates are very heated,” Michael Konczal, director of macroeconomic analysis at the Roosevelt Institute, told ABC News. “A lot of people are at the request of the team, the supply of the team, the transient team, the operation of the company by the team.”

“I think there is a reflection that there are a lot of causes,” he added. “Even if these causes evolve.”

Economists agree that inflation is due at least in part to a supply and demand crunch amid the pandemic during which federal stimulus has helped consumers buy goods at the exact time they need them. are stuck in a production and distribution bottleneck, experts told ABC News.

But economists disagree on the contribution of this supply disruption to inflation, as opposed to the market environment it created, in which companies could raise prices knowing that their competitors faced similar supply shortages that prevented them from flooding the market with cheaper deals. alternatives.

“In the case of industry-wide supply chain issues, such as during the pandemic, companies know that their competitors face the same bottlenecks as themselves,” said Isabella Weber, professor in economics at the University of Massachusetts Amherst, ABC News. “The public, too, is aware of the supply problems. Taken together, this presents a pretext for raising prices.

Josh Bivens, research director at the Institute for Left-wing Economic Policy, published a study in April which found that corporate profits accounted for more than half of price growth between 2020 and 2021 in the non-financial corporate sector, which accounts for around 75% of the private sector.

But the rise in profits stems from a confluence of factors that is likely unique to pandemic-era economics, Bivens said.

“I view the big profit margin bulge that drove prices up as another shock, like the pandemic, like the oil price shock,” he said.

A separate report of the Roosevelt Institute, a liberal think tank, found that companies that imposed higher-than-average profit margins before the pandemic were likely the same companies that raised prices during the pandemic, suggesting that some companies have exploited their position in the market to raise prices during the pandemic. In other words, if a company could raise its prices before the pandemic without fearing competitors, it could do so during it.

President Joe Biden speaks on gasoline prices during remarks in the South Court Auditorium of the Eisenhower Executive Office Building at the White House in Washington, June 22, 2022.

Kevin Lamarque/Reuters, FILE

“This suggests to us that corporate power has a small but real role to play in driving up inflation,” said Konczal, a Roosevelt Institute economist who co-authored the study.

But other experts have disputed the explanation that market power or greed drove companies to exploit market conditions during the pandemic, arguing that high prices reflect the forces of supply and demand rather than any wrongdoing on the part of a company.

Michael Faulkender, professor of finance at the Robert H. Smith School of Business at the University of Maryland, compared companies charging high prices to an individual putting their house on the market at a favorable time.

“Let’s say I bought a house five years ago and I’m looking to sell it for some reason. Do I set it at the price the market will bear or at the price I bought it at plus a pre-determined politically correct mark-up? ” he said. “I will price it at the price the market can bear.”

High prices at the grocery store or at the pump are the expected result of a market in which people have lots of money to spend but few products to buy, Faulkender said.

“The limited supply available goes to those with the highest value,” he said. “The profits then generated are a consequence but not the cause.”

Treasury Secretary Janet Yellen seems to share a view that downplays the role of corporate profits as a cause of inflation. Earlier this month, during a Senate Finance Committee hearing, Yellen declined opportunity to blame price hikes on corporate greedciting supply and demand as the main explanation.

Bivens, an economist at the Economic Policy Institute, criticized the value of recent price increases as market signals, which generally tell market participants where to invest resources. The pandemic-induced shift toward goods like platoons and lumber and away from face-to-face services is unlikely to persist for an extended period, he said.

“The line between rising prices and useful market signals is always quite difficult,” he said. “I don’t think those are useful signals.”

When economists look at corporate earnings, they indicate what, if anything, they think should be done about it. Bivens said he supported a tax on windfall corporate profits, a version of which was nominated by Sen. Bernie Sanders, I-Vt., in March. Meanwhile, Faulkender said the government should promote increased supply, especially in the energy sector, as a key way to deal with high prices.

Personal finances nationwide will depend on the outcome of corporate profits, Konczal said.

“Whether they naturally compete with themselves, whether political intervention helps to push the process forward, that has significant implications for inflation and the pocketbooks of ordinary people,” he said.