Corporate profits

Corporate profits, not wages, drive up inflation

This year, $11.17 has the same purchasing power as $10 in 2019, before the COVID-19 pandemic, according to the Bureau of Labor Statistics.

In fact, inflation is currently higher than it has been in 40 years. While some people might assume that higher wages are driving the jump, the data shows that corporate profits are actually driving the rise in inflation, says CBS News.

Inflation – the rate of increase in prices over a given period of time – leads to regular incremental increases in the consumer price index (CPI), a measure of the price of common goods and services. For example, the purchasing power of $10 in 2016 decreased by $0.62 in 2019, which is much less than the change of $1.17 over the past three years.

The data shows that the recent surge in inflation is mainly due to price increases for the goods part of the CPI rather than for services.

“Goods prices are the main driver of inflation,” Julia Pollak, labor economist at ZipRecruiter, told CBS MoneyWatch. “So far, wages have not been the main driver of inflation at all. Inflation was higher in the beginning in low labor intensive industries.

Prices for cars, fuel, housing and furniture rose, the data showed. Energy prices in particular added about 2 percentage points to headline inflation, according to Ryan Sweet, senior director of economic research at Moody’s Analytics.

“Higher energy prices are directly observable in the CPI for utilities, electricity, gasoline, fuel oil, but it also affects other prices that you and I pay. Companies have to transport their goods, and they will try to pass the higher transport costs on to you and me,” he explained.

Along with rising energy prices, supply shortages and supply chain issues could contribute to higher commodity prices. Company profit margins, or the amount of profit per sale, could also play a role.

Over the past year, as the world has battled the impact of the COVID-19 pandemic, after-tax corporate profits have actually reached record highs as a share of economic output, said the US Department of Commerce.
According to the Wall Street Journalalmost two-thirds of publicly traded companies had higher profit margins after the pandemic.

“Higher prices mean someone gets more income. Over the past year, it has been employers in sectors where supply has been reduced – shipping companies, oil producers and food wholesalers, for example – who get the extra revenue from higher prices,” said Josh Bivens, research director of the left-leaning Institute for Economic Policy.

Colgate-Palmolive, Procter & Gamble and Unilever, companies that produce popular consumer goods such as toothpaste and soap, have been able to raise prices without losing sales during the pandemic.

As these big companies increase their prices and the CPI shows a 7% increase, surveys and the conference board show that companies on average only plan to increase wages by 3 to 3.9%.

“Many companies we spoke to saw their overall payroll barely move,” Pollak said. “They have lost their most experienced and best paid people and replaced them with a younger cohort,” due to pandemic-related retirements. Additionally, productivity increases from employees working from home have kept unit labor costs steady, she said.

“If rising workers’ wages were really the main driver of prices, it follows that the more labour-intensive service sectors of the economy would see the biggest rise in consumer prices. “said CBS News.

However, the most labor intensive areas tracked by the CPI – restaurants and personal services – rose 6.2% and 4.7% from a year ago.

“Both of these numbers are still below the average inflation rate of 7.5%, and there are other categories that are seeing much higher price increases – gas prices, housing, furniture,” said Daniel MacDonald, chair of economics at California State University at San Bernardino. . “The reason these prices are going up is not because wages are going up for oil production in the United States. It’s about the oil markets, the real estate markets.”

Assumptions about the relationship between wages and prices may be rooted in how the U.S. economy worked in the previous century, CBS News explained. At that time, major industries were regulated, one-third of the country’s workforce was unionized, and companies were not allowed to buy back their own shares. This has changed since the late 1980s.

“It’s not that workers wouldn’t like to be able to get higher wages in response to rising price pressures, but rather a number of developments – most driven by intentional political decisions that have undermined power bargaining for workers in the labor market for decades,” Bivens wrote last month.

Another reason people might assume that higher wages fuel inflation is that increases on certain goods are more noticeable to consumers.

A 2016 study of minimum wage increases found that a 10% wage increase would result in only a 0.4% increase in consumer prices. It may be a small increase, but it’s one that consumers at McDonald’s and Chipotle might notice, said Barclays analyst Jonathan Millar.

“The relationship between wages and inflation is almost impossible to find,” according to Millar. “The link tends to be much weaker than a layman might think. It turns out that even during this pandemic it is not true that prices have actually kept pace with wages.”