Corporate profits

Corporate profits rise amid inflation as some Democrats cry foul

As consumers feel the pinch of inflation, corporate profits are at all-time highs, bolstering Democratic arguments that big business is ripping off consumers and making inflation worse.

Inflation has become a major headwind for Democrats ahead of this fall’s midterm elections, as the party risks losing its narrow House and Senate majorities.

Rising prices have contributed to President Biden’s declining approval ratings, adding to concerns among Democrats.

But Sen. Elizabeth Warren (D-Mass.) and other Democrats argue it’s increasingly clear that part of the problem is big business and that Democrats need to go on the offensive to fight back. inflation by pressuring American companies to stop raising prices.

“Giant corporations are using inflation as a hedge to raise prices and boost profits,” the senator wrote on Twitter last week. “Industry after industry, we have too little competition and companies have too much power to raise prices. I denounced these corporate profiteers and price gouging. »

The net profit margin during the first quarter for the S&P 500 Index of major U.S. companies was 12.1%, according to analysis by listed data firm FactSet.

Overall, after-tax corporate profits, as reported by the U.S. Bureau of Economic Analysis and compiled by the Federal Reserve Bank of St. Louis, reached $2.7 trillion in the fourth quarter of the year. last year, just off the all-time high of $2.72 trillion in the prior quarter.

This represents a 40% increase in profits from the pre-pandemic level of $1.96 trillion for the fourth quarter of 2019 and an increase of nearly 80% from the pandemic low point of $1.5 trillion. of dollars.

It’s unclear whether companies are profiting from inflation, as Warren suggests, or whether earnings simply reflect a strong economy.

“This is really a business cycle phenomenon, not changing patterns of greed or the desire to rip off consumers,” said Will McBride, an economist at the Tax Foundation, a right-wing think tank. Washington, in an interview.

He also said tax cuts from the Trump administration and a GOP congress helped the profits.

“In fact, what we see is even more than an economic cycle. In recent years we have had a major tax reduction with the Tax Cuts and Jobs Act, the main component of which was the reduction of the corporate tax rate from 35% to 21%, and that definitely boosted after-tax profits,” he said. .

McBride also said the dominance of Apple, Amazon, Netflix and other U.S. tech companies, which were poised to take advantage of pandemic-accelerated digitization trends, was another reason for the record profits.

Inflation itself could also be part of the source of the earnings windfall, according to Peter St. Onge, an economist at the Heritage Foundation in Washington.

“If you’re a business and you bought inventory a few months or a few years ago, and you sell that inventory today, you’ll get a higher price for it,” St. Onge said. “It’s an accounting profit, not a real economic profit, because assuming you want to keep running your business, you’ll have to replace that inventory. But it produces a short-term increase in the balance sheet.

The energy sector saw the biggest increase in profit margins over the past year, more than doubling to 11.1% from 4.6%, according to FactSet.

The jump comes amid rising gas prices that have risen further this year with Russia’s war on Ukraine and subsequent sanctions on Moscow.

FactSet analyst John Butters wrote in a report on the numbers that companies indexed in the S&P 500 are increasingly citing inflation as raising their costs.

“In the previous earnings season, 356 S&P 500 companies cited ‘inflation’ on fourth-quarter earnings calls, which was the highest number in at least a decade,” Butters wrote. .

“However, companies are also raising prices to offset these higher costs, as the S&P 500 is expected to post double-digit revenue growth for the fifth consecutive quarter.”

The record number of citations on inflation, coupled with skyrocketing profits, has led Democratic senators like Warren to cry foul.

“As we emerge from two years of the coronavirus pandemic, America’s efforts to get back to normal are hampered by inflation, in part because of corporate profits and price gouging,” she wrote in a statement. letter to the FTC.

His sentiments echo those of Sen. Bernie Sanders (I-Vt.), who wrote on Twitter in February: “Take a look at the economy. McDonald’s: profits up 59%. They raise the prices. Starbucks: record profits. They raise the prices. Amazon: record profits. Shock of shocks! They raise the prices!

FactSet’s Butters wrote that the earnings windfall is likely to continue, with S&P 500 companies expecting their profit margins to rise over the course of the year.

“Interestingly, analysts believe S&P 500 net profit margins will be higher than Q1 2022 for the rest of the year,” he wrote. FactSet expects the S&P 500 to post a profit margin of 12.7% for the second quarter of 2022, a margin of 13.1% for the third quarter and a margin of 12.8% for the fourth quarter of this year.

Although wages are rising, they are not rising enough to keep up with inflation or corporate profits.

According to analysis by the Peterson Institute for International Economics, wages and salaries rose 4.5% in 2021, the fastest increase since 1983. This lifted wages 1.2% above their baseline levels. before the pandemic.

But when adjusted for inflation, wages actually fell 2.4% over the same period. The most recent figures from the Department of Labor show that inflation-adjusted wages fell by 2.7% from March 2021 to March 2022. A slight decrease in the length of the average working week led to a drop of 3 .6% of inflation-adjusted wages over the last year.

“Short-term wages are pretty inflexible, they don’t adjust quickly to positive or negative market conditions,” said Kyle Pomerleau, an economist at the American Enterprise Institute. “More exposed to ups and downs than wages are corporate profits.”