When the economy rocketed out of the COVID-19 pandemic, supply chain issues and parts shortages inflated the cost of factory goods. Then a surge in consumer spending fueled by federal stimulus checks further drove up prices, followed by Russia’s invasion of Ukraine disrupting gas and food supplies that sent those costs sky high.
By early fall, inflation had spread beyond physical goods to the service sector, which includes everything from health care and airline tickets to auto repairs and hotel rates.
And it's not just the cost of everyday life that's rising, corporate profits and CEO pay are also surging to an all time high this year.
During a recent House oversight subcommittee hearing, Rep. Katie Porter, D-Calif., pointed to data from an Economic Policy Institute report which found that more than half of the increased prices people are paying are coming from increases in corporate profits, and not from higher overhead costs associated with operation and labor.
Mike Konczal, director of Macroeconomic Analysis at the Roosevelt Institute, a progressive economic think tank, testified at the hearing that his organization conducted its own analysis of corporate balance sheets and other federal data, and concluded similar results.
Porter isn't the only one frustrated with the narrative that companies and consumers alike are sharing in inflationary pain. Many consumers and lawmakers, including President Joe Biden, are casting the blame of surging prices on greedy corporations.
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Last week, Biden accused oil companies of “war profiteering” by making record-setting profits from a spike in gas prices amid the ongoing war in Ukraine. The president floated imposing a windfall tax on the profits of oil companies if they refuse to lower the prices at the pump.
Yet for all the public’s resentment, economists appear divided on the role that corporate price gouging is having on runaway inflation.
How is corporate profits driving inflation?
In 2022, inflation rates in the U.S. rose to its highest levels since the early 1980s. Consumer prices jumped 8.2% in September from a year ago, which was down from June’s four-decade high of 9.1%
While there is no one factor that's solely responsible for the rapid rise in global prices, some economists and consumer watchdogs argue some of the increases are due to companies excessively raising prices far beyond the level needed to cover rising overhead costs in order to rake in more profits.
Robert Reich, the former U.S. Secretary of Labor under the Clinton Administration and professor of public policy at the University of California, Berkeley, told NBC some companies use the “cover of inflation” as an excuse to hike up their prices.
Companies are telling customers that the cost of raw materials and labor have all increased, which is true, said Reich. However, many companies are exploiting a crisis and raising their prices even higher, he said.
Between 1979 and 2019, the cost of nonlabor expenses — raw material, maintenance, investments, shipping and energy — cost about 26% of a unit's value. In 2020 and in 2021, those costs increased by a little over 10% to 38.3%, according to an Economic Policy Institute analysis of data from the Bureau of Economic Analysis. At the same time, the cost of labor only contributed to an increase of 2%, rising from 5.9% in 2019 to 7.9% by the end of 2021.
Taking inflationary pressures into account, total overhead costs have only increased about 15% during the pandemic, yet the EPI analysis found companies on average have tacked 53.9% to the final cost of products, a 42% increase from a pre-pandemic level of 11.4% on average.
In other words, inflation gave companies pricing power, Reich said. If profit margins are rising in this economy, that means prices that companies are charging for their products are increasing faster than increases in production costs, Reich explained.
An analysis by the House Subcommittee on Economic and Consumer Policy of financial information from several corporations in some of the biggest industries found that three of the five largest shipping companies saw profits rise 29,965% between 2019 and 2021 and four of the largest companies in the meat processing industry saw profits go up by 134%.
Corporate profiteering is happening "because frankly, companies are saying it is happening," said Rakeen Mabud, chief economist and managing director of policy and research at the Groundwork Collaborative, a group that, among other things, tracks corporate earnings.
After listening to hundreds of earning calls, Mabud said CEOs and other corporate executives are acknowledging that they are raising its prices simply because they can. One example is Proctor & Gamble, which in their latest call with investors, admitted to the strategy of keeping prices high because it means bigger profits for their company and massive payouts to their shareholders.
“They were explicit about it,” said Mabud. Basically the company said, “because we produce essential goods, our customers are not going to stop buying our products.”
Groundwork also reported that the CEO of H.B. Fuller, a large adhesive company, recently told analysts that the company is starting to save money as some of the pandemic-related inflationary costs are declining. But CEO Jim Owens added they don't plan on passing any of those savings back to the consumer.
"We don’t reduce prices on the back end of these increases,” Owens reportedly said on the call, according to Groundwork, adding, “a nice light recession would be perfect for us because it would bring raw material costs down even more.”
The CEO of Iron Mountain Inc. told Wall Street analysts at a Sept. 20 investor event that the high levels of inflation over the past year helped the company increase its margins, The Intercept reported. For that reason, he had long been “doing my inflation dance, praying for inflation.”
It wasn’t a one-off comment by the CEO William Meaney. On a 2018 earnings call, he invoked a Native American ritual, telling participants that “it’s kind of like a rain dance, I pray for inflation every day I come to work because…our top line is really driven by inflation.”
Overall, companies are saying, “our expenses are going down but consumers don’t seem to notice,” said Mabud. Therefore, companies “will keep the prices as high as we can, as long as we can.”
In the end, “consumers are paying the price,” Mabud said.
Inflation isn't the only factor to blame for the corporate price-gouging, according to Reich, market concentration of power due to mergers that create monopolies have allowed a handful of dominate companies in many sectors to raise prices without fear of a competitor offering lower-priced alternatives.
“How long can (companies) continue to do this?” Reich asked. “That depends on how long consumers are willing and able to pay for the higher prices.”
"That could be some time because consumers, No. 1: have a little more savings post-pandemic; No. 2: they have a little bit of higher wages, No. 3: they have a higher demand because they have gone without a lot of things for over two years," Reich said.
With cost of living rising to unstable levels, Mabud said the government needs to “use the right policy tools in order to bring prices down without harming the same people who bore the brunt of these high prices.”
What can the government do to stop corporate inflation?
The Federal Reserve, which is charged by Congress to maintain a stable economy and financial system, has been aggressively raising interest rates to try to cool the price spikes. But so far, there's little sign of progress.
Reich said, putting aside some of the global factors, the reason the Fed's increases are failing to slow inflation is because the monopoly power of big corporations is what's driving inflation domestically.
Raising the rates is a, “circuitous and ineffective way of dealing with the domestic problem,” Reich said. “The Fed may have to do it, but by the time interest rates effect the dampening of prices, we could easily find ourselves in a deep recession.”
Reich pointed to what happened in the 1980s, when rates were raised so high and so fast that it caused the economy to go into a recession. He said the Fed should pause rate hikes to avoid a repeat scenerio.
“That’s why we can’t rely solely on the Feds one hammer,” Reich said. “If you only have a hammer then everything looks like a nail — the nail being the interest rate.”
Reich also argues that the government's antitrust authorities, such as the Federal Trade Commission and the Department of Justice's Antitrust Division, should launch investigations into the industries and companies that are raising prices the fastest. By doing so, it will show those companies that “they are watching,” Reich said.
“That itself, is likely to have a dampening or chilling effect on price increases,” Reich said. “Companies don’t want to go through antitrust litigation.”
The Democratic-controlled House passed a bill in May authorizing the FTC and state attorneys general to punish companies that engage in price gouging and adding a new unit at the FTC to monitor fuel markets. The Price Gouging Prevention Act, introduced by Sens. Elizabeth Warren, D-Mass., and Tammy Baldwin, D-Wis., has stalled in the Senate.
Another policy that has been floated by several progressive lawmakers is a windfall profits tax, which is a one-time tax levied on excess profits to raise badly needed government revenue during a time of national crises.
In late March, Sen. Bernie Sanders, I-Vt., introduced legislation which would impose a 96% windfall tax on the "excess profits" of major companies. Sanders said the bill would raise an estimated $400 billion in one year from just 30 of the largest corporations.
“The American people are sick and tired of the unprecedented corporate greed that exists all over this country,” Sanders said in a statement. “They are sick and tired of being ripped-off by corporations making record-breaking profits while working families are forced to pay outrageously high prices for gas, rent, food, and prescription drugs.
The Ending Corporate Greed Act has not advanced passed the Senate Finance Committee.
This summer, Senate Finance Committee Chair Ron Wyden, D-Ore., also introduced a windfall tax bill, the Taxing Big Oil Profiteers Act, which would impose a 21% tax on the “excess profits” of oil and gas companies making more than $1 billion annually. Wyden said the U.S. tax code should benefit the American people, "not oil executives and their wealthy shareholders."
“What does a healthy economy look like,” asked Mabud. “Not one where shareholders or the stock market is doing well. It’s one where workers and families and consumers…are able to live a good life and have a cost of life that is sustainable.”
