Aiexpress – There is a new report stating that there is strong evidence indicating that high corporate profits play a significant role in driving ongoing inflation. Despite the fact that their inflationary costs are decreasing, companies are still maintaining high prices.
According to a report from the progressive Groundwork Collaborative thinktank, corporate profits were responsible for approximately 53% of inflation during the second and third quarters of last year. This is a significant increase compared to the 40 years prior to the pandemic, where profits only contributed to 11% of price growth.
Consumer prices increased by 3.4% in the past year, while input costs for producers only saw a 1% rise, as per calculations made by the authors using data from the Bureau of Economic Analysis and National Income and Products Accounts.
According to Liz Pancotti, a strategic adviser at Groundwork and co-author of the paper, corporations have managed to significantly reduce their costs. However, despite being quick to pass on their increased costs to consumers, they have been surprisingly reluctant to pass on their savings to consumers.
Since the spike in pandemic inflation in 2021, there has been a heated debate regarding its underlying causes. Progressive economists have attributed it to corporate profits, also known as “greedflation,” and supply chain challenges. On the other hand, more conservative economists have placed the blame on government stimulus cash and higher wages.
During their analysis, the report’s authors extensively reviewed corporate earnings calls and discovered that executives were proudly boasting to shareholders about their ability to maintain high prices and expand profit margins, all while experiencing a decrease in input costs.
The Federal Reserve’s decision to raise interest rates to their highest level in two decades is being called into question by a recent report. The findings of the report challenge the necessity for further interest rate hikes and advocate for more robust measures to curb “corporate profiteering.”
In 2021, prices increased due to the surge in labor costs and disruptions in supply chains caused by the pandemic and the Ukraine war. These factors led to shipping traffic delays and uncertainty in energy supplies. However, the situation has improved as these issues have been resolved or are gradually improving. The labor market has also stabilized. Interestingly, some commodities and services producers have experienced a decrease in prices, as highlighted in the report.
Large declines in energy costs, including jet fuel and diesel fuel, were the main drivers behind the nearly 60% drop in key goods and services’ inputs. Additionally, transportation and warehousing costs have seen a decrease of almost 4% since reaching their peak in June 2022.
Despite the ongoing situation, the cost of groceries continues to remain high. As an example, the report highlights that consumers are still paying approximately 25% more for their grocery purchases.
According to Isabella Weber, an economist from the University of Massachusetts Amherst who was not involved in the study, corporations keep prices high by taking advantage of cost shocks resulting from events like the Ukraine war and by coordinating price increases.
According to Weber, the shocks establish a safe environment for companies to raise prices, as they anticipate their competitors to follow suit.
According to the expert, this behavior can be seen as a type of hidden collaboration among companies. She explains that there is no need for direct communication for firms to understand that a sudden increase in costs presents an opportunity to raise prices. However, when costs decrease, these firms lack the motivation to lower their prices.
According to Weber, when no firms engage in a price war, companies choose to “hold the line” on prices and increase their profit margins. She used food processors as an illustration of this practice.
The focus of this paper is on the diaper industry, where Procter & Gamble and Kimberly-Clark dominate with a combined 70% share of the domestic market. Since 2019, diaper prices have surged by over 30%, rising from an average of $16.50 to nearly $22.
The surge in prices can be attributed in part to the rise in commodities, particularly wood pulp, which is a significant ingredient in diapers. Between January 2021 and January 2023, wholesale wood pulp prices experienced a staggering 87% increase. However, it is worth noting that prices did decline by 25% last year.
However, the authors of the study argue that despite the decrease in costs, diaper prices have not seen a corresponding decrease. They conducted an analysis of earnings calls and found that executives from both companies, Kimberly Clark and Procter & Gamble, were actually proud of the fact that their profit margins were expanding due to lower input costs. In fact, the decrease in input costs contributed to approximately one-third of Kimberly Clark’s profits, according to company executives.
During their July earnings call, P&G executives mentioned that they anticipate windfall profits of $800 million due to the decrease in input costs. This suggests that they do not plan to lower prices.
Workers, on the other hand, are not experiencing the same level of success. While corporate profits have increased by approximately 29% as a percentage of national income, workers’ share of corporate earnings remains lower than pre-pandemic levels.
According to Pancotti, the Biden administration has implemented measures to enhance supply chains. Additionally, Joe Biden has urged corporations to refrain from exploiting consumers by charging exorbitant prices when input costs decrease. However, Pancotti and Weber advocate for more robust actions, citing other countries that have implemented forms of price control.
In France, the government plays an active role in mediating price discussions between retailers and producers. Just recently, Carrefour, a leading supermarket chain, took a stand against PepsiCo by removing certain products from its shelves due to what they deemed as “unacceptable price hikes.” This move was supported by the government.
According to Pancotti, if there is no strong government intervention in pricing, the expiration of the Trump corporate tax cuts in 2025 can be used as a chance to control corporations through the tax code.
“We, as a nation, have come to a consensus that we value the existence of robust and influential corporations, even if it means they generate significant profits,” she expressed. “It is incumbent upon us to critically examine our tax regulations that encourage corporate profit-making and question whether we, as a nation, desire to address this issue.”
