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Inflation Revelation: How Outsized Corporate Profits Drive Rising Costs [1]

['Lindsay Owens', 'Common Dreams', 'Groundwork Collaborative']

Date: 2024-05

Inflation Revelation: How Outsized Corporate Profits Drive Rising Costs

Overview Inflation has come down significantly from its peak over the past year, yet prices remain high for American consumers. As supply chain snarls have receded and the economy has stabilized, businesses continue to pad their bottom lines, rather than passing these savings on to consumers.

By: Liz Pancotti, Strategic Advisor, and Lindsay Owens, Executive Director Inflation Revelation: How Outsized Corporate Profits Drive Rising Costs As Their Cost of Doing Business Comes Down, Corporations Pad Their Bottom Lines on the Backs of Consumers Inflation has come down significantly from its peak over the past year, yet prices remain high for American consumers. From housing and groceries to car insurance and electric bills, families are still feeling the squeeze. In the wake of the pandemic, virtually every company in every industry faced rising costs to make products and stock shelves. Labor costs rose sharply, the cost of transporting goods across the country hit record highs, and raw materials became costly or impossible to get. Corporations were quick to pass rising costs – and a little extra – on to consumers, fueling rapid inflation. As supply chain snarls have receded and the economy has stabilized, businesses continue to pad their bottom lines, rather than passing these savings on to consumers. Download the full report here. Corporate Profits Are Driving More Than Half of Inflation Some economists and pundits have sought to discredit the link between inflation and corporate profiteering. A Washington Post columnist recently claimed that blaming inflation on corporate profiteering is like saying, “it’s raining because water is falling from the sky.” But this isn’t true. Prices are simply the sum of costs and corporate profits. While rising costs of inputs can drive up what Americans pay at the gas pump or the grocery store, corporate profits can just as easily. As corporations have lamented supply chain woes and higher labor costs over the past two years, their profits have skyrocketed, fueling inflation and exacerbating a longstanding affordability crisis. Some economists suggested that markup growth in 2021 was primarily driven by corporations raising prices in anticipation of future cost increases. However, corporate profit margins have remained high – and even grown – as labor costs have stabilized, nonlabor input costs have come down, and supply chain snarls have eased. While labor and nonlabor input costs have played a role in price increases, corporate profits drove 53 percent of inflation during the second and third quarters of 2023 and more than one-third since the start of the pandemic. Comparatively, over the 40 years prior to the pandemic, they drove just 11 percent of price growth.

Source: Bureau of Economic Analysis, National Income and Products Accounts, Table 1.15, Author’s Calculations

Corporate profits as a share of national income has skyrocketed by 29 percent since the start of the pandemic. While our economy has returned to or surpassed its pre-pandemic levels on many indicators, workers’ share of corporate income has still not recovered.

Source: Bureau of Economic Analysis, National Income and Products Accounts Tables 1.14 and 6.16D, Author's Calculations

As White House National Economic Council Director Lael Brainard has noted, “Overall, the labor share of income has declined over the past two years and appears to be at or below pre-pandemic levels. While corporate profits as a share of GDP remain near postwar highs.” Economist Isabella Weber has pointed out that corporations are keeping prices high even as post-pandemic and Ukraine War supply chain pressures ease and wage growth slows. Why? Because they can. Weber argues that supply shocks allowed corporations to tacitly collude, hike prices, and rake in record profits. This type of inflation, where corporations raise prices to protect – and even increase – their profit margins, allows prices to rise faster than the costs to make goods or provide services. When corporations pursued this opportunistic pricing strategy, they found a lot of space to increase prices, drive up profits, and see very little dropoff in demand. Though inflation has eased, prices remain tremendously elevated from their pre-pandemic levels. Housing costs, for example, are up 21 percent, and grocery costs have risen by 25 percent. Consumer Prices are Rising Much Faster Than Corporations’ Input Costs While prices for consumers have risen by 3.4 percent over the past year, input costs for producers have risen by just 1 percent. For many commodities and services, producers’ prices have actually decreased.

Source: Bureau of Labor Statistics, Consumer Price Index, Table 5; Producer Price Indexes, Table A

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[1] Url: https://groundworkcollaborative.org/work/inflation-revelation-how-outsized-corporate-profits-drive-rising-costs/

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