Democrats Blast Company Earnings as Inflation Surges

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Inflation remains high at the start of 2022, and Democrats have started pointing out a new culprit for the steep and lasting price hikes: greedy corporations.

Senator Sherrod Brown of Ohio, Senator Elizabeth Warren of Massachusetts and White House spokeswoman Jen Psaki were among those who pointed to excessive profits in certain industries as a thing that drives up costs to consumers. They do not blame headline inflation on the price-driving companies – but the bottom line is that higher prices are, in part, the product of company opportunism.

The explanation for inflation is the latest in a series that the Democrats have offered since price gains shot up to uncomfortably high levels last year. It is partly due to economic reality, partly to political necessity: Rising prices burden and unsettle consumers and make them a burden for a party that has only a weak influence on the control of Congress in the 2022 midterm elections.

Prices have increased the fastest since 1982 and while inflation is widely expected to ease in the coming year, the pace and extent of this slowdown are uncertain. Even if price gains slow, they could be a headache for the Biden government if they continue to rise faster than they did before the pandemic – which economists are increasingly expecting. They have hovered around or below 2 percent for years, but Federal Reserve officials believe they will hit an average of 2.6 percent by the end of this year.

The government has limited power over prices: it is making adjustments to the margins to curb them, but controlling inflation is mainly the job of the Fed, which has signaled that it expects to hike rates this year to help control it.

However, as consumers feel the rising prices of food, gas and housewares, it creates a political news problem for the Democrats. Lawmakers and the White House had originally argued that rapid inflation was a sign that airfare and hotel prices were recovering and falling quickly, but supply chains and booming consumer demand for goods kept them elevated throughout 2021. More recently, price pressures have started to spread to service categories like rent, where increases are typically long-lasting – and as wages rise rapidly, this increases the possibility for companies to keep raising prices to cover their costs.

As inflation proves stubborn, administrators and prominent lawmakers have refined their message to place more blame on businesses, especially those in concentrated industries with a handful of powerful companies like meat processing or gas.

Many companies – from car dealerships to beauty salons to beef sellers – make higher profits by successfully increasing their prices or offering fewer discounts while still managing to sell as much or more. However, economists have suggested that in many cases it is too easy to blame large corporations for worsening inflation. Industries have been relatively concentrated for years, but companies now have the wherewithal to charge more because consumers are spending a lot. This is partly due to government economic controls and other benefits that have put more money in the pockets of buyers.

“It’s exactly what you would expect when demand increased,” said Jason Furman, a Harvard economist and former chairman of the White House Economic Advisory Council during the Obama administration.

The laws of supply and demand have not stopped many on the political left from challenging businesses.

“Profits for the largest US corporations soared to over $ 3 trillion this year and margins continue to grow,” Brown, chairman of the Senate Banking Committee, said during a recent hearing. “Megacorporations would rather pass higher costs on to consumers than reduce their profits.”

Ms. Warren pointed to robust corporate profits as a sign that companies are partly responsible for the rising costs.

“Companies are taking advantage of the pandemic to impose higher prices on consumers for their daily needs, from milk to gasoline,” she wrote on November 26th on Twitter. “American families shouldn’t fund the record-breaking profits of American companies.”

And White House economic advisers have pointed out what is known as price-driving behavior in a few specific, concentrated industries. Mr Biden has publicly promoted a review of oil companies’ prices, and the government has announced measures to combat price-fixing in meat processing, pointing out that four large companies control 85 percent of the beef market.

“When too few companies control such a large portion of the market, our food supply chains are vulnerable to shock,” the government said in a Jan. 3 press release, reiterating an argument that administrative officials have increasingly emphasized.

“I would say there are some areas where companies are benefiting and benefiting from the pandemic,” Ms Psaki said at a press conference in December.

The fact is that big company profits are skyrocketing in many industries, a sign that companies are either selling more goods and services, or are managing to make more profit on every unit sold thanks to higher prices or better productivity. Based on the corporate earnings calls and a flood of data, it’s likely a combination of these factors.

Based on data released by Standard & Poor’s, market analyst Edward Yardeni estimates that 2021 will be a year of robust profit margins – the amount companies make after deducting their costs. After shrinking sharply at the start of the pandemic, margins rose to a record high of 13.7 percent in the second quarter before falling to 13.6 percent in the third.

In his opinion, this is partly due to increases in efficiency, partly because some companies have raised their prices more than their costs have increased, which was previously difficult for them without losing customers.

“It became culturally acceptable to raise prices,” said Yardeni. “Consumers could understand that many companies are under pressure to pass on their costs.”

Frequently asked questions about inflation

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What is inflation Inflation is a loss of purchasing power over time, which means your dollar won’t go as far tomorrow as it is today. It is usually expressed as the annual change in the price of goods and services for everyday use such as food, furniture, clothing, transportation costs and toys.

What causes inflation? This can be the result of increasing consumer demand. However, inflation can also rise and fall due to developments that have little to do with economic conditions, such as limited oil production and supply chain problems.

Is Inflation Bad? It depends on the circumstances. Rapid price increases mean trouble, but moderate price increases could also lead to higher wages and employment growth.

Can inflation affect the stock market? Rapid inflation usually means trouble for stocks. Financial assets in general have performed poorly during past inflation booms, while tangible assets such as houses have held up better.

On the phone calls there are many companies talking about pushing their increasing spending onto their customers without selling less. Anecdotally, some of the industries hardest hit by the pandemic scarcity, like used car dealers, are reporting managing to charge even more as their costs rise.

Auto dealers’ profit margins “have remained above their long-term average,” according to a recent Fed survey of business contacts based on interviews in the central bank’s Chicago borough. The Richmond, Virginia District contacts reported similar trends.

However, several economists said that for the most part, it makes no sense to blame corporate profit-making for today’s price hikes. Corporate concentration has been high for years, but inflation has been low for decades.

Any sane company wants to increase prices without hurting sales: the pandemic and the government’s response to it have given today’s businesses the opportunity to do so.

“It is the combined effect of the Covid disruption and the stimulus package at the same time,” said Thomas Philippon, an economist at New York University who deals with corporate concentration. “The companies were always greedy.”

While concentration gives companies more opportunities to capitalize on unusual moments – perhaps they can react more quickly as consumer expectations change – the companies that ask for more are not all big and dominant. America has a lot of car dealerships.

Some economists argue that government policies may be one reason why companies have recently been able to charge more without losing business. Households have amassed huge savings during the pandemic, both because people were stuck at home early and because the government repeatedly sent out relief and economic checks. Many qualified for expanded unemployment benefits or a more generous child tax credit.

These savings have helped consumers buy more even though prices have started to rise. And while people are now spending their holdings with aid programs phased out – and sentiment data shows they are more and more uncomfortable with the economy as prices go up – rising wages could help keep consumer spending strong.

The mix also plays a role. Consumers are still heavily channeling their dollars into goods. That could mess up supply chains and drive prices up.

It is difficult to say whether the companies will continue to prevail. Their costs are also increasing rapidly.

It may take time for rising production costs to be fully reflected in company profits as companies sign forward-looking contracts for parts. In addition, new employment contracts with strong wage increases are only now emerging.

“I don’t see any real evidence that companies are raising prices more than you’d expect in the face of rising operating and labor costs,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “A distinction must be made here between pricing power – passing on a cost increase and pricing power – increasing a margin.”