inflation
A think tank report said “clear evidence” shows companies continue to keep prices high even as their inflationary costs fall
Fri January 19, 2024 11:00 GMT
A new report says “clear evidence” shows that high corporate profits are a key driver of ongoing inflation and that companies continue to keep prices high even as their inflation costs fall.
The report, prepared by the progressive think tank Groundwork Collaborative, concluded that corporate profits accounted for about 53% of inflation in the second and third quarters of last year. According to the report, profits accounted for just 11% of price growth in the 40 years before the pandemic.
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Prices for consumers rose 3.4% last year, but input costs for producers rose just 1%, according to the authors' calculations, which were based on data from the Bureau of Economic Analysis and the National Income and Products Accounts.
“Costs have fallen significantly, and while companies have been quick to pass on their increased costs to consumers, they are surprisingly less quick to pass on their savings to consumers,” said Liz Pancotti, strategic advisor to Groundwork and co-author of the article.
Since pandemic-induced inflation peaked in 2021, a heated debate has erupted over the causes. Many progressive economists pointed to corporate profits – or “greed inflation” – and supply chain problems as drivers of high prices, while their more conservative colleagues highlighted government stimulus programs and high wages.
The report's authors combed through corporate earnings calls and found executives bragging to shareholders about keeping prices high and increasing profit margins while input costs fell.
The results come as the Federal Reserve has raised interest rates to their highest level in 20 years. The report raises serious doubts about the need for further interest rate hikes and instead calls for tougher measures to curb “corporate profiteering”.
Prices rose in 2021 as labor costs rose and supply chain shocks from the pandemic and the Ukraine war paralyzed shipping and challenged energy supplies. However, in many cases these problems have been completely resolved or are easing and the labor market has stabilized. Prices for many raw material and service producers have actually fallen, the report says.
Nearly 60% of the decline in inputs of essential goods and services was due to sharp declines in energy costs, such as jet fuel and diesel fuel, while transportation and storage costs fell nearly 4% from their peaks in June 2022.
Nevertheless, prices remain high. Consumers still pay about 25% more for groceries, the report says as an example.
Companies maintain high prices by exploiting cost shocks caused by events such as the Ukraine war and coordinating price increases, said Isabella Weber, an economist at the University of Massachusetts Amherst who was not involved in the study.
The shocks create an environment in which it is safe for companies to raise prices because they expect their competitors to do the same, Weber said.
“This is a form of tacit collusion,” she said. “Companies don’t even have to talk to each other to know that a cost shock is a good time to raise prices. But when costs fall, price-setting companies have no incentive to lower prices.”
If no companies start a price war, Weber added, then companies will “hold the line” on prices and increase their margins. She cited kitchen machines as an example.
The article focuses on the diaper industry, where Procter & Gamble and Kimberly-Clark control 70% of the domestic market. Diaper prices have increased more than 30% since 2019, from an average of $16.50 to nearly $22.
The increase was partly due to a rise in raw materials such as wood pulp, a key ingredient in diapers. Wholesale wood pulp prices rose 87% between January 2021 and January 2023, but last year prices fell 25%.
Still, diaper prices have not fallen despite lower costs, the authors say. Groundwork examined earnings announcements and found that executives at both companies were bragging about increasing their profit margins while input costs fell. About a third of Kimberly Clark's profit came from a decline in inputs, company executives said.
P&G executives said in their July earnings call that they expect $800 million in unexpected profits due to falling input costs, suggesting they will not cut prices.
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Meanwhile, workers aren't doing so well – the share of corporate profits in national income has risen by about 29%, and workers' share of corporate profits is still below pre-pandemic levels.
The Biden administration has taken steps to strengthen supply chains, Pancotti noted, and Joe Biden recently called on companies to stop “gouging” consumers as input costs fall. But Pancotti and Weber called for stronger measures and pointed to other countries that had already introduced forms of price controls.
In France, the government intervenes in price negotiations between retailers and producers. Earlier this month, supermarket chain Carrefour, with government support, banned some PepsiCo products from its shelves due to “unacceptable price increases.”
Without strong government intervention in pricing, the expiration of Trump's corporate tax cuts in 2025 presents an opportunity to rein in companies through the tax code, Pancotti said.
“We've decided as a country that we like to have very large, powerful companies, and we're OK with them being very profitable,” she said. “We need to take a hard look at how our tax code incentivizes corporate profiteering and ask ourselves, 'Do we as a country want to do something about it?'”
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