Greedy corporations cash in as prices skyrocket
PROFITEERING: Some firms’ earnings hit record highs as inflation spikes
If you are getting sticker shock at the grocery store and gas pump, you might get some solace in knowing that you are not alone.
The bogeyman called inflation by economists has returned with a vengeance not seen in four decades.
No wonder economics is widely known as the ‘Dismal Science’!
However, a debate about the causes of inflation has erupted in recent months. Some blame rapidly rising costs – and this is part of the story.
But a growing group of others blame greedy corporations with enormous market power taking advantage of the situation to hike prices way beyond what their increased costs justify.
This is profiteering … and it’s not a new phenomenon.
No one knows for sure exactly how to tame rampant inflation, but everyone is looking hopefully at the Federal Reserve Bank and its Chairman Jerome Powell for the answer.
If your experience is anything like mine, every time you go to your grocery store the tab seems to be higher. It’s not your imagination: it is!
It’s not just staples; prices are rising for almost everything we buy, including tangible goods like fuel and groceries but also services like restaurant meals and airplane tickets.
The Bureau of Labor Statistics reported on May 11 that prices rose 8.3% over the previous 12 months.
Despite President Joe Biden’s comments this week, those looking to politicians for a way to tame inflation are, unfortunately, looking in the wrong place.
Not even the president has any real (or imagined) levers he can pull to stop it. Congress certainly doesn’t.
The one institution that is specifically charged with price stability is the Federal Reserve Bank, and it has recently engaged in the battle in a big way.
Inflation was the main topic at the May 4 meeting of the Fed’s Open Markets Committee and Chairman Powell’s news briefing afterwards.
He wasted no time getting right to the point: “Inflation is much too high and we understand the hardship it is causing, and we’re moving expeditiously to bring it back down,” Powell said. “We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses.”
The Fed actually has a dual mandate: its priority right now is inflation, but it’s also charged with maintaining maximum employment, and these two goals are closely related, as Powell noted.
“It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all,” he said.
The Fed’s stated goal is to keep price increases to an average of 2% per year, but as the BLS reported, prices are rising much faster than this target.
Powell also mentioned the two other major drivers of recent price spikes – war and new pandemic lockdowns in China.
“The surge in prices of crude oil and other commodities that resulted from Russia’s invasion of Ukraine is creating additional upward pressure on inflation,” he said. “And COVID-related lockdowns in China are likely to further exacerbate supply chain disruptions as well.”
As Powell said, one of the biggest drivers of recent inflation has been the huge increase in oil prices over the last year.
According to MacroTrends which tracks the oil price history back to 1946, the price of a barrel of oil on May 6 was $109.
This was was up from $66 in May 2021, a stunning 60 percent annual increase!
The price of oil has a major effect on inflation because there is no other commodity quite like it.
Not only is oil an essential ingredient in a wide range of manufactured products like gasoline and plastics, but it is also indirectly involved in almost every other product we buy – and many of the services we use.
Oil’s fundamental role in the economy is because almost all goods are, at some stage of production, transported from producers to consumers.
The transportation cost must be factored into the price of virtually everything we buy. With such a huge run-up in the price of oil this year, it is no surprise that prices for hundreds of other products are rising too.
But this is only part of the problem.
While Powell’s May 4 briefing focused on the cost pressures driving the general increase in prices, it was notable as much for what he did not say as for what he did say.
The Fed chairman did not mention a word about the record corporate profits that were reported earlier by Bureau of Economic Analysis in its estimate of Gross Domestic Product.
The BEA analysis was summarized in the MarketWatch report U.S. corporate profits jump 25% in 2021 to record high which found that, “U.S. corporate profits rose again in the fourth quarter and hit a record high, capping off a huge increase in 2021 despite widespread supply and labor shortages that raised costs and contributed to high inflation during the pandemic.”
Adjusted pretax profits rose 0.7% to an annualized $2.94 trillion in the final three months of last year from $2.92 trillion in the third quarter, the BEA said.
For the full year, adjusted profits leaped 25% — the largest gain since 1976.
“The U.S. economy’s rapid recovery from the pandemic has padded the profits of most businesses, especially large ones that were better shielded from the effects of the virus,” MarketWatch reported.
“Although companies are paying higher costs, they’ve still managed to increase profits.” (emphasis added)
It’s no coincidence that the best example of corporate giants taking advantage of rising costs to massively improve their profits is found in the oil industry.
As reported May 7 by USA Today in Oil giants reap record profits some of the world's leading oil companies enjoyed immense profits for the first three months of this year.
Shell led the pack with a record $9.1 billion. BP followed at $6.2 billion (its highest in over a decade), while Exxon at $5.48 billion doubled its net income from the previous year. Chevron was no slouch at $6.2 billion, more than four times its profit a year earlier!
The connection between rising costs and record corporate profits was the subject of an April 21 Economic Policy Institute article Corporate profits have contributed disproportionately to inflation, which noted that over half of the increase in prices during the past year (53.9%) can be attributed to fatter profit margins, with labor costs contributing less than 8% of this increase.
“Evidence from the past 40 years suggests strongly that profit margins should shrink and the share of corporate sector income going to labor compensation (or the labor share of income) should rise as unemployment falls and the economy heats up,” wrote Josh Bivens.
“The fact that the exact opposite pattern has happened so far in the recovery should cast much doubt on inflation expectations rooted simply in claims of macroeconomic overheating.”
In other words, only a relatively small portion of the huge run-up in prices can be blamed on rising labor and materials costs. The rest, it says, is huge corporations using their market power to fatten their profits.
“[A] chronic excess of corporate power has built up over a long period of time, and it manifested in the current recovery as an inflationary surge in prices rather than successful wage suppression,” the article concludes.
This conclusion was backed up in a survey published in March by the Digital web site More than half of retail businesses are using inflation to price gouge, in which it reported on a survey of 1,000 retail owners and executives asking how inflation is impacting profitability, pricing, and discount offers.
“Our findings revealed that more than half of retail businesses are using inflation to drive up prices higher than what’s necessary to offset increased costs.”
The key findings of the survey were:
56% of retail businesses say inflation has given them the ability to raise prices beyond what’s required to offset higher costs;
Over half of retailers have increased prices by 20% or more on average, way above general inflation rates;
More than half of businesses are offering fewer discounts than previously or none at all; and
Shrinking discounts and increasing prices of complementary products are the most popular ways businesses are driving up prices.
If the survey did not convince you that profiteering has at least some role in current sky-high price increases, then the work of the Groundwork Collaborative might.
An advocacy organization, the Groundwork Collaborative says it “is dedicated to unifying progressives and activists in communities across the country to refine and advance a progressive economic worldview.”
An article published by it’s Executive Director Dr. Lindsay Owens on May 5 was summarized on its web site where she reported on her group’s monitoring of earnings calls by publicly traded companies in the third quarter of 2021.
“What was striking in the earnings calls was not the supply chain shortages or companies’ typical profit motives; it was the plain old corporate profiteering,” Owens reported in her article.
“Executives on their earnings calls crowed to investors about their blockbuster quarterly profits. … These executives weren’t just passing along their rising costs; they were going for more.”
More profits, that is. Owens laid the blame squarely on the concentration of market power in fewer and few enormous corporate giants.
“Companies have pricing power when consumers don’t have a choice. Other times pricing power comes from concentrated market power,” she wrote.
“What we learned on these earnings calls was quickly reflected in data. Despite the rising costs of labor, energy and materials, profit margins reached 70-year highs in 2021.”
“This raises the question: When companies are exploiting consumers in a time of national crisis, when should the government step in?”
The group advocates a variety of legislative solutions including a federal price gouging law; increasing the corporate tax rate; or imposing excess-profits taxes.
“Regulators, even without new legislation, should start by enforcing existing laws, including ones against price fixing, price gouging and collusion,” the group says.
On its affiliated web site End Corporate Profiteering the group states its position in clear, plain language:
“Corporate profiteering and monopoly power are big drivers of price increases. Mega-corporations are taking full advantage of recent crises – the pandemic, supply chain issues, and the war in Ukraine – to charge customers more and pad their profit margins. And they hold enough market power to do so without fear of losing customers to other competitors.”
Evidence indicates abuse of power
What all this seems to point to is that both rising costs and abuse of market power to reap excess profits are driving up prices at historically high rates.
The evidence is mounting that some companies – especially giant corporations – are taking advantage of the inflationary environment to pad their profits. Profiteering is something that could, in theory, be reigned in by government intervention.
The actions taken by the Fed will not address profiteering. This is not its mandate, and rising interest rates may even make the situation worse.
More aggressive action is clearly needed. Among the solutions: more enforcement of existing rules like anti-trust lawsuits and imposition of an excess profits tax – all might help.
Outrage over profiteering is justified. Whether it will result in an appropriate response from government remains to be seen.
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