Critics say corporate greed is making inflation worse, citing record profits despite rising costs

• Left-leaning think tanks and lawmakers say price gouging is making inflation worse.
• They cite record corporate profits despite rising costs that should curb earnings.
• Conservative economists say those arguments ignore basic laws of supply and demand now weighing on the market.

Skyrocketing inflation has been pinned on supply chain bottlenecks, worker pay increases and surging consumer demand – all symptoms of an economy still emerging from the pandemic-induced downturn.

But left-leaning think tanks and lawmakers are increasingly pointing to what they say is an even bigger culprit: corporate greed.

Companies, they say, are jacking up prices by more than is required to offset their rising wholesale costs, padding their profits while using supply snags as cover.

“They see (inflation) as an opportunity,” says Lindsay Owens, executive director of Groundwork Collaborative, a progressive economic policy research group. “It’s a convenient pretext.”

Conservative economists say such arguments cast an unfair shadow over basic laws of supply and demand. Americans, they argue, have lots of money and are willing to pay the higher prices triggered by product shortages.   

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There is no federal law barring a company from charging consumers whatever it likes as long it doesn’t collude with its competitors to boost prices by an agreed-upon amount. Thirty-eight states do prohibit raising prices excessively during disasters or emergencies.

That could change. Citing “unprecedented corporate greed,” Sen. Bernie Sanders, I-Vt., chairman of the Senate Budget Committee, introduced a bill last month that would impose a 95% tax on large corporations’ “excess profits.” It would be the first such windfall profits tax since World War II.

Healthy corporate profits

Exhibit A in progressives’ case for price gouging is the current earnings season. The net profit margin of Standard & Poor’s 500 companies in the first quarter has been running at 12.3%, based on estimates and earnings reported so far, according to FactSet. That’s down from a peak of 13.1% in the second quarter of last year but well above the pre-COVID-19 level of about 11%.

The strong showing came despite annual inflation that climbed to a 40-year high of 8.6% in March, which should have squeezed companies' profits.

And last year, the aggregate profit margin of nonfinancial corporate businesses hovered above 13% in all four quarters, the best performance in 70 years, according to a Bloomberg analysis of government data. 

“Profit margins should be coming down,” says Owens of Groundwork Collaborative, who testified at a Senate Budget Committee hearing on corporate profiteering and inflation early this month. Instead, she noted, “they’re actually growing.”

At the budget committee hearing, former Labor Secretary Robert Reich, a public policy professor at the University of California, Berkeley, blamed mergers and weak antitrust enforcement that has led to concentrated industries with fewer players, most notably in broadband, pharmaceuticals, meat processing and consumer staples. Since the 1980s, two-thirds of U.S. industries have become more concentrated, he said.

“Corporations enjoying record profits in a healthy competitive economy would absorb (their higher costs),” Reich said. “Instead, they’re passing these costs onto consumers in the form of higher prices. Why? Because they can. And they can because they don’t face meaningful competition.”

A recent analysis by lead U.S. economist Oren Klachkin of Oxford Economics found that industries with fewer competitors are enjoying the most pricing power during the current spate of inflation. They include chemicals; technology; utilities; food, beverage and tobacco; and industrial goods and services.

Of course, companies in many of these industries have enjoyed big market shares for years. Yet inflation averaged less than 2% in the decade following the Great Recession of 2007-09.

Inflation offers corporations cover

Besides the supply troubles and robust consumer demand, critics say inflation itself is providing businesses an excuse to lift prices.

“With consumers expecting rising prices, it’s easy to tack on some extra beyond the corporation’s own increased costs,” Reich said at the hearing.

He doesn't leave out oil and gas companies — a favorite target of consumers as pump prices stay above $4 a gallon — noting they posted near-record profits last year and could have absorbed the recent increase in energy costs.

Oil prices, however, are determined by a global market and producers typically pass them along to refiners. Crude oil producers theoretically could collude by agreeing to scale back production to keep prices high but there have been no findings of that, says Phil Verleger, an industry analyst and a senior fellow at the Niskanen Institute.

And the retail gasoline market is fragmented. If a gas station hoisted its pump price too sharply, it would lose business to rivals, Verleger says.

Overall, though, 56% of retailers say inflation has allowed them to raise prices above what’s required to offset higher costs, according to a survey of 1,000 retailers by Digital.com in November. More than half the retailers say they've pushed up prices by an average of 20% or more.

Although investors have been nervous that inflation would pinch first-quarter profits by increasing companies’ expenses, sharper price increases have gone along with higher earnings in four of the past seven decades, says Jim Paulsen, chief investment strategist for the Leuthold Group. And now, companies have the most flexibility to raise prices since the 1970s, when inflation was more than 50% higher, he says.

Paulsen chiefly cites strong job and wage growth that has given many consumers the wherewithal to withstand higher prices. But he also says widespread inflation has conditioned many Americans to expect further run-ups. 

“The consumer’s mindset changes,” Paulsen says.

A year ago, Proctor & Gamble, the consumer products giant, announced it would start charging more for a range of staples, including diapers and toilet paper, pointing to increased costs for raw materials such as resin and pulp, as well as higher freight expenses.

Yet the company reported “whopping” operating margins of 24.7% during the second half of last year, after the price hikes took effect, Reich said during his testimony. That was up from 20.9% in early 2021.

“As we take pricing, we see a lower reaction from the consumer in terms of price elasticity than what we would have seen in the past,” P&G Chief Financial Officer Andre Schulten told analysts during an earnings call in January that was cited by Owens at the hearing.

P&G would not comment. But in its fiscal third-quarter earnings report last week, the company said its operating margin was 20.8%, down from 24.7% the prior quarter, while its gross margin was down 2.4 percentage points to 46.7%. It cited the impact of commodity and transportation cost increases. 

'Consumers get used to it'

Constellation Brands, maker of Corona and Modelo beers, is also nudging up prices in part because of a more pliable consumer, Reich told lawmakers. 

“Given the current economic environment this year, we've determined that we can take more pricing than we typically have, and that's what's driving us to” raise prices slightly above the company’s usual 2% limit, Garth Hankinson, the company's chief financial officer, told analysts in January.

In a statement provided to USA TODAY, Constellation said Reich took the remark out of context and Hankering was responding to an analyst’s question about why it hasn’t boosted prices more aggressively.  

And in a March 2 earnings call, Hostess CEO Andy Callahan explained the company's price hikes by saying, “Consumers get used to it. When all prices go up, it helps. So there's a relative pricing thing that I think every food business has experienced.”

The company declined to comment.

Mike Faulkender, who served as assistant secretary for economic policy at the Treasury Department under former President Donald Trump, disagreed that executives' comments to analysts amount to evidence of price gouging.  

"The fact that CEOs get on earnings calls (and talk about) making money isn't a shock," he says.

Still, in a blog last week, Josh Bivens research director at the left-leaning Economic Policy Institute, said more than half of the 6.1% overall price increase among nonfinancial corporations during the recovery can be traced to fatter profit margins while labor costs contributed less than 8%. From 1979 to 2019, earnings contributed about 11% to price gains and labor costs accounted for more than 60%.

Are supply and demand the problem?

Faulkender, Trump's former Treasury official and now a finance professor at the University of Maryland’s business school, says criticism of corporate profit margins fails to account for the laws of supply and demand. Consumer demand was turbocharged by federal stimulus payments at the same time that global supply kinks created product shortages, he says.

“Prices are not set” to cover costs plus a profit margin, says Faulkender. “They are set to bring quantity demanded into equilibrium with quantity supplied. When there is excess demand, prices rise and those selling the product receive higher revenue as a result.

“Do we prefer that there be shortages, hoarding of products, and a first-come, first-served approach to rationing?” 

Owens retorted, "Anyone who still believes CEOs raise prices as efficient and benevolent stewards of supply shortages is living in a fantasy land found only in an introductory economics textbook."

Faulkender also notes that wholesale costs have risen more rapidly than retail prices, underscoring that businesses haven’t passed all their increased expenses to consumers. In March, wholesale costs surged 11.2%, compared with the 8.6% rise in consumer prices.

Owens, though, says it's difficult to compare the Labor Department’s wholesale and consumer price indices because they don’t measure the same basket of products and services. The wholesale index includes raw materials and intermediate goods, she says.

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