This year, as inflation hit 40-year highs, some lawmakers suggested that high corporate profits have been driving inflation. But economists say that’s backward: Inflation, for now, is boosting corporate profits.
Democratic Sens. Elizabeth Warren of Massachusetts and Jeff Merkley of Oregon area bill that would authorize the Federal Trade Commission and state attorneys general to ban "unconscionably excessive price increases." The senators argue that "opportunistic corporations are using inflation to conceal their abuse of pricing power, exponentially increasing prices for American consumers.", sponsored by Sen. Bernie Sanders, I-Vt.
Since the recession year of 2009, corporate profits, measured in raw dollars, have doubled for the economy as a whole. But certain sectors have outpaced that: Profits are now 3.6 times higher than 2009 for retail; 4.8 times higher for transportation and for food and lodging; 5.3 times higher for manufacturing; and 7 times higher for construction.
Instead, he said, corporations have focused on sharing profits with shareholders and buying back stock, practices that have hit record highs in recent years.A company that hasn’t seen its costs rise could theoretically join the price-raising bandwagon out of sheer opportunism. But it’s more common, economists say, for inflation to directly produce higher profits.
Meanwhile, on the demand side, the U.S. government under Presidents Donald Trump and Joe Biden spent heavily to keep the economy, and especially consumer purchasing, from cratering during the COVID-19 pandemic. Once the pandemic’s throttle on travel and hospitality spending eased, consumers’ spending surged.
Also, wages have not kept pace with rising prices for consumer goods and services, partly because salaries for the workforce’s middle tier tend not to be adjusted for sudden changes. That means for companies, revenue has risen but labor costs have increased by less, or not at all — and companies have captured that differential as profit, said Michael Faulkender, a University of Maryland finance professor who was the Treasury Department’s assistant secretary for economic policy from 2019 to 2021.
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