Inflation remains rapid as the economy enters 2022, and Democrats have begun pointing to a new culprit for the high and lasting price increases: Greedy corporations.
Senator Sherrod Brown of Ohio, Senator Elizabeth Warren of Massachusetts, and the White House spokeswoman, Jen Psaki, have been among those pointing to excessive profits in certain industries as one thing jacking up costs for consumers. They don’t blame overall inflation on price-gouging businesses — but the implication is that higher prices are partly the product of corporate opportunism.
The explanation for inflation is the latest in a string Democrats have offered since price gains shot up to uncomfortably high levels last year. It is partly grounded in economic reality, partly in political necessity: Rising prices are burdening and unsettling consumers, making them a liability for a party with a tenuous hold on Congressional control headed into 2022 midterm elections.
Prices are increasing at the fastest pace since 1982, and while inflation is broadly expected to fade in the year ahead, the speed and extent of that moderation is uncertain. Even if price gains slow down, they could remain a headache for the Biden administration if they continue to rise more rapidly than was normal before the pandemic — which is what economists increasingly expect. They had hovered around or below 2 percent for years, but Federal Reserve officials think they will reach an average of 2.6 percent by the end of this year.
The administration has limited power over prices: It is making tweaks around the edges to help to tamp them down, but keeping a lid on inflation is mostly the job of the Fed, which has signaled it expects to begin raising interest rates this year to help control it.
Still, as consumers feel the pinch of higher prices for food, gas and household goods, it’s creating a political messaging problem for Democrats. Lawmakers and the White House had initially argued that fast inflation was a sign that airfares and hotel rates were bouncing back and would fade quickly, but supply chain snarls and booming consumer demand for goods kept them elevated throughout 2021. More recently, price pressures have begun to broaden to service categories, like rent, in which increases tend to be long-lasting — and as wages climb swiftly, it raises the possibility that companies will keep lifting prices to cover their costs.
As inflation proves stubbornly sticky, administration officials and prominent lawmakers have refined their message to focus more blame on corporations, especially those in concentrated industries with a handful of powerful firms, like meat processing or gas.
Many companies — from car dealerships to beauty stores and beef sellers — are raking in bigger profits as they successfully raise their prices or discount less while still managing to sell as much or more. But economists have pointed out that in many cases, blaming big firms for worsening inflation is overly simplistic. Industries have been relatively concentrated for years, but businesses now have the wherewithal to charge more because consumers are spending strongly. That owes partly to government stimulus checks and other benefits that have put more money in shoppers’ pockets.
“It’s what you would fully expect when demand goes up,” said Jason Furman, a Harvard economist and a former chairman of the White House Council of Economic Advisers during the Obama administration.
The laws of supply and demand have not stopped many on the political left from calling companies out.
What to Know About Inflation in the U.S.
- Inflation, Explained: What is inflation, why is it up and whom does it hurt? We answered some common questions.
- The Fed’s Pivot: Jerome Powell’s abrupt change of course moved the central bank into inflation-fighting mode.
- Fastest Inflation in Decades: The Consumer Price Index rose 6.8 percent in November from a year earlier, its sharpest increase since 1982.
- Why Washington Is Worried: Policymakers are acknowledging that price increases have been proving more persistent than expected.
- The Psychology of Inflation: Americans are flush with cash and jobs, but they also think the economy is awful.
“Profits at the biggest U.S. companies shot above $3 trillion this year, and the margins keep growing,” Mr. Brown, chairman of the Senate Banking Committee, said during a recent hearing. “Mega corporations would rather pass higher costs on to consumers than cut into their profits.”
Ms. Warren has pointed to robust corporate profits as a sign that companies are partly to blame for rising costs.
“Corporations are exploiting the pandemic to gouge consumers with higher prices on everyday essentials, from milk to gasoline,” she posted on Twitter on Nov. 26. “American families shouldn’t be bankrolling corporate America’s record-high profits.”
And White House economic advisers have pointed to what they have called price gouging behavior in a few specific, concentrated industries. Mr. Biden has publicly encouraged an examination of oil company pricing, and the administration has announced measures to try 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 susceptible to shocks,” the administration said in a Jan. 3 release, repeating an argument administration officials have increasingly highlighted.
“I would say there are some areas where we have seen corporations benefit, profit from the pandemic,” Ms. Psaki said at a news conference in December.
It is the case that big company profits are surging across many industries, a sign that companies are either selling more goods and services or are managing to eke more profit out of each unit that they are selling thanks to higher prices or better productivity. Based on corporate earnings calls and a spate of data, it’s likely a combination of those factors.
Using data reported by Standard & Poor’s, the market analyst Edward Yardeni estimates that 2021 was a year of robust profit margins — the amount companies earn after subtracting their costs. After contracting sharply early in the pandemic, margins jumped to a record-high 13.7 percent in the second quarter before ticking down to 13.6 percent in the third.
He thinks that owes partly to efficiency improvements, and partly to the fact that some firms have raised prices by more than their costs have climbed, something that they had previously struggled to do without losing customers.
“It kind of became culturally acceptable to raise prices,” Mr. Yardeni said. “Consumers could understand that many corporations are under pressure to pass on their costs.”
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation costs and toys.
What causes inflation? It can be the result of rising consumer demand. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.
Where is inflation headed? Officials say they do not yet see evidence that rapid inflation is turning into a permanent feature of the economic landscape, even as prices rise very quickly. There are plenty of reasons to believe the price burst will fade, but some concerning signs suggest it could last.
Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains could also lead to higher wages and job growth.
How does inflation affect the poor? Inflation can be especially hard to shoulder for poor households because they spend a bigger chunk of their budgets on necessities — food, housing and especially gas.
Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.
Earnings calls are replete with businesses talking about pushing their rising expenses onto their customers without selling less. Anecdotally, some of the industries hit hardest by pandemic shortages, like used car dealers, report managing to charge even more than their costs are increasing.
Car dealer profit margins “remained above their long-run averages,” a recent Fed survey of business contacts found, based on interviews in the central bank’s Chicago district. The Richmond, Va., district’s contacts reported similar trends.
But several economists said that, for the most part, blaming business profit seeking for today’s price increases does not make sense. Corporate concentration has been high for years, but inflation had been low for decades.
Any rational company would want to raise prices without hurting sales: The pandemic, and the government’s response to it, have given today’s firms the ability to do so.
“It is the compound effect of the Covid disruptions and the stimulus package at the same time,” said Thomas Philippon, an economist at New York University who studies corporate concentration. “The firms were always greedy.”
While concentration may give companies more ability to capitalize on an unusual moment — perhaps they can react faster as consumer expectations shift — the firms charging more are not all big and dominant. America has plenty of car dealerships.
The administration’s policies may be part of the reason that companies are newly managing to charge more without losing business, some economists have argued. Households amassed large saving stockpiles during the pandemic, both because people were stuck at home early on and because the government sent out repeated relief and stimulus checks. Many qualified for expanded unemployment benefits or a more generous Child Tax Credit.
Those savings have helped consumers to buy more, even as prices have begun rising. And while people are now spending down their cash piles as support programs expire — and sentiment data shows that they are feeling more and more uncomfortable about the economy as prices climb — rising wages could help to keep consumer spending strong.
The mix also matters. Consumers are still funneling their dollars heavily toward goods. That could keep supply chains roiled and prices rising.
It is hard to tell whether companies will continue to win out. Their costs are also increasing quickly.
Climbing production expenses may take time to fully show up in corporate earnings, since companies make forward-looking contracts for parts. In addition, fresh labor contracts containing big pay increases are shaping up only now.
“I don’t really see any great evidence that businesses are raising prices by any more than you would expect, given the rising cost of inputs and labor,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “There’s a distinction to be made here between pricing power — passing on a cost increase, and pricing power — widening a margin.”