Are Record Corporate Profits Driving Inflation?

Some people attribute the record corporate profits to driving inflation, while others cast doubt on that theory since they believe it is unlikely that a significant change in corporate concentration occurred during the pandemic over the course of just a few years.

Are Record Corporate Profits Driving Inflation? 1

Budgets for necessities like gas and groceries have been strained by sky-high inflation, but many huge firms have recorded record profits, angering some regular people and public authorities over price gouging.

Such dissatisfaction recently surfaced in response to skyrocketing gas prices. President Joe Biden accused big oil refinery firms in a letter earlier this month of using the market to make money while Americans struggle to pay for gas.

Progressive senators like Sen. Elizabeth Warren, D-Mass., and Sen. Jeff Merkley, D-Ore., who supported a bill (pdf below) last month that would give a federal agency and state attorneys general the authority to enforce a ban on excessive price spikes, claim that the issue goes far beyond gas.

However, economists are divided on the contribution that rising corporate profits have made to inflation; some claim that they account for more than half of the rise in prices, while others claim that they have had little to no impact.

[jetpack_subscription_form title="Subscribe to GreatGameIndia" subscribe_text="Enter your email address to subscribe to GGI and receive notifications of new posts by email."]

Some people who do attribute some of the price hikes to corporate price gouging claim that market concentration permits a small number of dominant corporations in a particular industry to raise prices without worrying that their rivals will undercut them with less expensive substitutes. Others, however, cast doubt on that theory since they believe it is unlikely that a significant change in corporate concentration occurred during the pandemic over the course of just a few years.

The disagreement among economists is also partially a result of differing opinions on whether corporate profits have caused inflation or have merely been a reaction to it. This is because a pandemic-induced supply-demand shock to the global market has made it more attractive for many businesses to raise prices.

“It’s a very intense time for people and their pocketbooks — I understand why these debates are very heated,” said Michael Konczal, the director of macroeconomic analysis at the Roosevelt Institute. “A lot of people are on team demand, team supply, team transitory, team corporate gouging.”

“I think there’s a reflection that there are a lot of causes,” he added. “Even as those causes are evolving.”

Experts told ABC News that economists are in agreement that the pandemic’s supply-demand imbalance, which resulted in customers buying items at precisely the wrong moment due to a production and distribution backlog, is at least partially to blame for inflation.

However, economists disagree over the extent to which this supply disruption caused inflation, as opposed to the market environment it produced, which allowed businesses to raise prices in the knowledge that their rivals were also experiencing supply shortages, preventing any of them from flooding the market with less expensive alternatives.

“In the case of sector-wide supply chain issues, as during the pandemic, firms know that their competitors face the same bottlenecks as themselves,” said Isabella Weber, a professor of economics at the University of Massachusetts Amherst. “The public, too, is aware of the supply issues. Taken together, this presents a pretext to increase prices.”

Josh Bivens, the head of research at the left-leaning Economic Policy Institute, published a study in April that found the non-financial business sector, which makes up approximately 75% of the private sector, saw corporate profits account for more than half of the price growth between 2020 and 2021.

But according to Bivens, the profit rise is the result of a confluence of elements that are probably unique to the economy of the pandemic age.

“I view the big fattening of profit margins that boosted prices as another shock, like the pandemic, like the oil price shock,” he said.

A different study by the liberal think tank Roosevelt Institute found that it was likely that the same companies that had higher-than-normal markups before the pandemic also increased prices during it, indicating that some businesses may have taken advantage of their dominant market positions to do so. In other words, if a business could raise prices without worrying about rivals before the epidemic, it could do the same during it.

Are Record Corporate Profits Driving Inflation? 2
President Joe Biden speaks about gas prices during remarks in the Eisenhower Executive Office Building’s South Court Auditorium at the White House in Washington, June 22, 2022.

“This makes us think there’s a small but real role for corporate power to be involved with the increase in inflation,” said Konczal, the economist at the Roosevelt Institute, who co-authored the study.

However, other experts disputed the idea that market dominance or greed motivated businesses to take advantage of market circumstances during the pandemic, claiming that high prices actually reflect factors of supply and demand rather than any wrongdoing on the side of a business.

Michael Faulkender, a finance professor at the Robert H. Smith School of Business at the University of Maryland, compared those who charge high rates to people who sell their homes at a profit.

“Let’s say I bought a house five years ago, and I’m looking to sell it for whatever reason. Do I price it at what the market will bear or what I bought it for plus a politically correct predetermined markup?” he said. “I’m going to price it at what the market can bear.”

According to Faulkender, high costs at the pump and grocery store are an expected result of a market where consumers have plenty of disposable income but few options for what to buy.

“The limited supply available goes to those with the highest value,” he said. “The profits then generated are a consequence but not the cause.”

Janet Yellen, the secretary of the Treasury, seems to hold a similar perspective that downplays the influence of corporate profits on inflation. Yellen declined the chance to attribute price increases to corporate greed earlier this month before a Senate Finance Committee hearing, citing supply and demand as the main justification.

Watch the video below:

The Economic Policy Institute’s analyst Bivens questioned the validity of recent price increases as market signals, which normally advise market participants where to allocate their resources. It is unlikely that the pandemic-induced shift to items like Pelotons and lumber and away from in-person services will last for an extended length of time, he said.

“The line between price gouging versus useful market signals is always a pretty tough one,” he said. “I don’t think these are useful signals.”

What, if anything, economists believe should be done regarding corporate profits depends on where they stand on the issue. Sen. Bernie Sanders, I-VT, previously proposed a tax on unforeseen corporate gains, and Bivens stated he is in favor of a similar measure. As a fundamental strategy to combat high prices, Faulkender asserted that the government should encourage increased supply, particularly in the energy industry.

According to Konczal, the state of personal finances countrywide will depend on corporate profit levels.

“Whether they’re naturally competed away on their own, whether policy intervention is going to help nudge the process along, it does have important consequences for inflation and everyday people’s pocketbooks,” he said.

Read the bill given below:

GreatGameIndia is being actively targeted by powerful forces who do not wish us to survive. Your contribution, however small help us keep afloat. We accept voluntary payment for the content available for free on this website via UPI, PayPal and Bitcoin.

Support GreatGameIndia
Price-Gouging-Prevention-Act

Leave a Reply