Opinion: Companies cynically used global crises to boost their profits — and, therefore, inflation
Throughout all the debate in the last year over what has caused higher prices and how to remedy them, one term hasn’t received the attention it deserves, given how well it explains the trend: “Greedflation.”
The term defines as what happens when businesses raise prices higher and faster than is needed to cover increases in their costs. We’ve reported before that soaring corporate profits have contributed more to inflation than the Federal Reserve
Board’s preferred targets, wages and consumer demand. Two recent papers, however, measure their impact and identify some of the leading culprits by name.
Researchers at the Federal Reserve Bank of Kansas City calculated that in 2021, when inflation reached an annualized rate of 5.8%, corporate markups grew by 3.4%. The upshot:
Markups “could account for more than half of 2021 inflation.”
In other words, during a period in which consumer demand largely cratered because people were staying home, businesses jacked up prices so far and so fast that they more than compensated for the decline in overall sales.
That’s the finding of the second paper, by Isabella M. Weber and Evan Wasner of the University of Massachusetts Amherst. They traced price increases at several companies and connected them with their executives’ public indications that the pandemic, along with oil price shocks resulting from the Russian invasion of Ukraine and supply logjams at American ports, gave them headroom to raise prices without a significant backlash from consumers.
Once publicity about higher inflation percolated through news reports, consumers came to expect higher prices, which were blamed more on the headlined inflationary factors than on businesses’ inclination to protect or even increase their profit margins.
“Publicly reported supply chain bottlenecks and cost shocks,” Weber and Wasner wrote, “serve to create legitimacy for price hikes and create acceptance on the part of consumers to pay higher prices.”
What Weber and Wasner labeled “sellers’ inflation” has posed problems for the Fed’s effort to bring inflation down that the central bank has never adequately confronted. The run-up in prices instituted by big corporations, the authors wrote, prompted workers to demand higher wages; amid a labor shortage, wages indeed rose — for a time.
The Fed tried to combat the recent inflationary surge with tools that had been developed for more conventional inflationary cycles. In those cycles excess demand forced prices higher; therefore tamping down demand by raising interest rates has been a customary remedy. That’s been the strategy of the Fed over the last year, during which it has raised rates by a full five percentage points.
But that has only further victimized those harmed most by inflation: workers. “Ultimately,” write Weber and Wasner, “hiking interest rates is meant to increase unemployment, which hurts workers who have already been in a defensive position in this inflation.”
The Fed has tended to downplay the role of corporate profit-seeking in driving inflation. “Until recently it was considered heretical to point to a possible relationship between the first signs of a profit explosion and sharp price increases,” Weber and Wasner observe.
Yet the extraordinary increase in corporate profits has unfolded in plain sight. Since the dawn of the 21st century, wages have gained 82%. Corporate profits have soared by nearly 600%. Corporate markups — that is, prices over costs — spiked much higher than historical averages. “Between 1960 and 1980, markups averaged 26% above marginal costs,” Joseph E. Stiglitz and Ira Regmi of the Roosevelt Institute noted in December. “The average markup charged in 2021 was 72% above the marginal cost.”
During the pandemic, corporate chief executives have been unabashed about disclosing their pricing strategies and tying them to the inflationary atmosphere.
As PepsiCo Chief Financial Officer Hugh Johnston told investment analysts in April 2021, “the environment is well set up for pricing to be positive going forward.”
At the giant food-processing company Tyson Foods, executives were equally confident in May 2021 that consumers would stay docile. Responding to a Wall Street analyst’s question about how the company would manage through a “very inflationary” environment, Chief Operating Officer Donnie King said that Tyson’s customers “certainly understand the inflationary need,” adding, “I think we will be quite successful in this endeavor” — that is, responding to inflation with price hikes.
Tyson, indeed, was able to fatten its profit margins through price increases that more than compensated for lower sales volumes during the pandemic. In the fourth quarter of 2021, its sales of beef fell by
6.2% compared with the same period in 2020, but it raised prices by 31.7%, enabling it to widen its operating margin on beef to 19.1% from 13.2%.
In the case of chicken, sales grew only 3.6% from the fourth quarter of 2020 to the same quarter a year later, but Tyson raised prices by 19.9% — turning a negative margin of 7.6% at the end of 2020 to a 3.6% profit a year later.
Another company that bobbed atop the inflation wave through higher prices was Procter & Gamble, which markets such familiar products as Pampers diapers, Bounty paper towels, Gillette razors, Head & Shoulders shampoo and Crest toothpaste. In the fourth quarter of 2022, sales across all
P&G’s product segments fell by 6% compared with a year earlier, but it raised prices by 10%, limiting its overall decline in profit