Corporate profits

Democrats Blast Corporate Profits as Inflation Rises

Inflation remains rapid as the economy enters 2022, and Democrats have begun to point to a new culprit for high and sustained price increases: greedy corporations.

Senator Sherrod Brown of Ohio, Senator Elizabeth Warren of Massachusetts, and White House spokeswoman Jen Psaki, were among those who pointed to excessive profits in some industries as something driving up costs for consumers. They don’t blame headline inflation on corporate price gouging – but the implication is that the higher prices are partly the product of corporate opportunism.

The explanation for inflation is the latest in a series Democrats have offered since price gains hit uncomfortably high levels last year. It’s partly based on economic reality, partly on political necessity: rising prices are weighing on and disrupting consumers, making it a liability for a party with a tenuous grip on Congressional control in the run-up to 2022 midterm elections.

Prices are rising at the fastest rate since 1982, and while inflation is expected to ease overall over the coming year, the speed and extent of this moderation is uncertain. Even if price gains slow, they could remain a headache for the Biden administration if they continue to rise faster than pre-pandemic normal — something economists increasingly expect. They had hovered around or below 2% for years, but Federal Reserve officials think they will reach an average 2.6% by the end of the year.

The administration has limited power over prices: It makes adjustments around the edges to help rein in them, but keeping a cap on inflation is primarily the job of the Fed, which has signaled it expects start raising interest rates this year to help control it.

Yet as consumers feel the pinch of higher prices for food, gas and household items, it creates a political messaging problem for Democrats. Lawmakers and the White House initially argued that rapid inflation was a sign that airfares and hotel rates were rebounding and quickly fading, but supply chain grunts and exploding demand from consumers for goods have kept them high throughout 2021. More recently, pricing pressures have begun to broaden into service categories, like rent, where increases tend to be long-lasting – and like wages are rising rapidly, this increases the possibility that companies will continue to raise prices to cover their costs.

As inflation proves stubbornly sticky, administration officials and prominent lawmakers have refined their message to place more blame on corporations, especially those in concentrated industries with a handful of powerful firms, like the transformation of the meat or gas.

Many businesses, from car dealerships to beauty shops and beef sellers – make bigger profits by successfully raising their prices or lowering their discounts while managing to sell the same or more. But economists have pointed out that in many cases blaming big business for worsening inflation is too simplistic. industries have been relatively concentrated for years, but now companies can afford to charge more because consumers are spending a lot. This is partly due to government stimulus checks and other perks that have put more money in shoppers’ pockets.

“That’s what you expect when demand increases,” said Jason Furman, a Harvard economist and former chairman of the White House Council of Economic Advisers during the Obama administration.

The laws of supply and demand haven’t stopped many on the political left from calling the companies.

“Profits for America’s largest corporations have exceeded $3 trillion this year, and margins continue to grow,” said Mr. Brown, chairman of the Senate Banking Committee. at a recent hearing. “Mega-corporations would rather pass on higher costs to consumers than reduce their profits.”

Ms. Warren pointed to strong corporate earnings as a sign that companies are partly to blame for rising costs.

“Companies are exploiting the pandemic to charge consumers higher prices on basic necessities, from milk to gasoline,” she said. posted on Twitter November 26. “American families shouldn’t be funding America’s record corporate profits.”

And White House economic advisers pointed to what they called price-raising behavior in a few specific, concentrated industries. Mr. Biden has publicly encouraged a review of oil company prices, and the administration announced measures in an attempt to tackle price fixing in meat processing, pointing out that four large companies control 85% of the beef market.

“When too few companies control so much of the market, our food supply chains are susceptible to shocks,” the administration said in a Jan. 3 statement, repeating an argument that officials administration have increasingly put forward.

“I would say there are areas where we have seen companies benefit, take advantage of the pandemic,” Ms Psaki said during a press conference in December.

It is the case that big business profits are increasing in many sectors, a sign that companies are selling more goods and services or are managing to make more profit from each unit they sell through higher prices or improved productivity. Based on corporate earnings announcements and a series of data, it’s likely a combination of these factors.

Using data reported by Standard & Poor’s, market analyst Edward Yardeni believes that 2021 has been a year of strong profit margins – the amount companies earn after subtracting their costs. After contracting sharply at the start of the pandemic, margins reached a record high of 13.7% in the second quarter before falling back to 13.6% in the third.

He believes this is partly due to efficiency improvements and partly because some companies have raised prices more than their costs have increased, which they previously struggled to do without losing customers. .

“It’s kind of become culturally acceptable to raise prices,” Yardeni said. “Consumers could understand that many companies are under pressure to pass on their costs.”

Earnings calls are full of companies talking about passing on their growing expenses to their customers without selling less. Anecdotally, some of the industries hardest hit by pandemic shortages, such as used car dealerships, report success in charging more as their costs rise.

Auto dealer profit margins “remained above their long-term averages,” the Fed said recently. business contact survey found, based on interviews in the central bank’s Chicago district. Contacts from the Richmond District, Virginia, reported similar trends.

But several economists have said that, for the most part, blaming corporate profit motives for today’s price increases doesn’t make sense. Corporate concentration has been high for years, but inflation has been low for decades.

Any rational business would want to raise prices without hurting sales: the pandemic and the government’s response to it have given today’s businesses the opportunity to do just that.

“It’s the compound effect of the Covid disruptions and the stimulus package at the same time,” said Thomas Philippon, an economist at New York University who studies corporate concentration. “Corporations have always been greedy.”

While concentration may give companies more ability to capitalize on an unusual moment – perhaps they can react more quickly as consumer expectations change – not all companies that charge more are big and dominant. America has lots of car dealerships.

Government policies may partly explain why companies manage to charge more without losing customers, some economists have claimed. Households have built up large stocks of savings during the pandemic, both because people were stuck at home at first and because the government has repeatedly sent relief and stimulus checks. Many were eligible for expanded unemployment benefits or a more generous child tax credit.

These savings helped consumers buy more, even as prices began to rise. And while people are now spending their stacks of cash as support programs expire – and sentiment data shows that they feel increasingly uneasy about the economy as prices rise – rising wages could help keep consumer spending buoyant.

The mix matters too. Consumers continue to direct their dollars massively towards goods. This could keep supply chains disrupted and prices rising.

It’s hard to say whether the companies will continue to win. Their costs are also rising rapidly.

Increased production spending may take time to fully show up in corporate earnings as companies enter into forward-looking contracts for parts. In addition, new employment contracts containing big salary increases are only looming now.

“I don’t really see hard evidence that companies are raising prices more than expected, given the rising cost of inputs and labor,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “There is a distinction to be made here between pricing power – passing on an increase in costs, and pricing power – widening a margin.”