The big contributors to inflation you're not hearing about: profiteering corporations

Michael Hiltzik, Los Angeles Times on

Published in Business News

Konczal and Lusiani found that whereas average corporate markups, a fair proxy for profits, averaged about 26% above marginal costs from 1960 through 1980 and about 56% during the 2010s, they shot up to 72% in 2021.

"In other words," they wrote, "in 2021, we see a sharp increase in ... firms in the aggregate decoupling their prices from their underlying costs."

Higher markups "don't necessarily have to translate to higher profits," they added, "but they did in 2021." Net profit margins, or profits divided by revenues, averaged 6% during the 2010s; in 2021 the figure jumped to 9.5%, "its highest value on record."

The authors acknowledge that the trend may have moderated in the last few months. "But corporate markups are real," Konczal, the Roosevelt Institute's director of macroeconomic analysis, told me.

"Bringing them down would be beneficial to the economy," he says, "especially if you don't think that profits will necessarily go to more investment but simply be paid out as bonuses to shareholders and bosses."

Businesses certainly face genuine inflationary pressures. The most significant are related to the price of oil, either directly in the price of fuel or indirectly through prices for materials driven up themselves by higher energy prices. Supply chain constrictions have also contributed to higher prices for parts and raw materials.


But the higher profit margins indicate that businesses are raising prices more than would be necessary to cover their own higher costs.

At this point, businesses may sense they have the latitude to raise prices in part because consumers expect it, given the relentless reporting of inflation fears. (This is one way that inflation tends to feed on itself.)

Yet it's possible that corporate profits will come down through a confluence of natural factors. Businesses might decide to absorb some wage increases and other costs, such as fuel, without passing them all on to consumers and tacking on additional vigorish.

There are signs that some of that may be happening: Retailers are preparing to cut prices to move outdated or excess merchandise out of warehouses and off the shop floor. Some consumer companies may sense greater resistance from customers if prices continue to stick at high levels, particularly if they see competitors undercutting them.

But as long as the narrative about the causes of inflation remains focused on wages and employment, policymakers may make the wrong choices about how to bring it down. "There is room for these margins to come down," Konczal says. Federal Reserve Chairman Jerome H. Powell "doesn't much talk about corporate profits and the ability of those margins and markups to decline and help take some of the pressure off."

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