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Corporate pricing is boosting inflation — but we’re still buying

Corporations pass more than increased costs on to consumers.

A customer pumps gasoline as the fuel price is displayed above six dollars a gallon at a Chevron gas station in downtown Los Angeles, California, on February 17, 2022.
A customer pumps gasoline as the fuel price is displayed above $6 a gallon at a Chevron gas station in downtown Los Angeles, on February 17.
Patrick T. Fallon/AFP via Getty Images

On recent earnings calls, massive corporations have posted huge profits and promised continued price increases, even as inflation continues to rise to rates not seen in decades.

For example, Starbucks celebrated a 31 percent increase in profits at the end of 2021 — but it still plans to hike prices this year, the New York Times reported earlier this month. Tyson Foods, the meat processing behemoth, raised its prices 19.6 percent overall, driving record stock prices for the company.

Inflation, meanwhile, hit a four-decade high in January, with the consumer price index increasing 7.5 percent over the past year, before seasonal adjustment. Although prices dropped in the energy sector for goods like gasoline and fuel oil, every other sector — including medical care, apparel, transportation, food, and shelter — saw increases, resulting in the largest overall 12-month increase since 1982.

Some of that’s to be expected: With Covid-19 still throwing kinks into the global supply chain, the challenge of getting goods and materials where they need to be translates into increased prices for both companies and consumers. Meanwhile, consumers have increased purchasing power due to wage increases and stimulus benefits like checks, child tax credits, and low interest rates — and at least in the US, they’ve proven willing to pay higher prices. At its core, those are the necessary ingredients for inflation — demand outstripping supply.

But some economists and politicians say that corporations are using inflation as an excuse to jack up prices beyond what’s necessary to account for their increased costs. More than just passing those costs onto consumers, they say, corporations are taking advantage of the unprecedented global economic circumstances to increase their profits, simply because they can.

Politicians like Sens. Elizabeth Warren (D-MA) and Sherrod Brown (D-OH) have recently drawn attention to what they say are outsized price increases made worse by anticompetitive corporate behavior.

Economists like Nobel laureate Joseph Stiglitz see it too; in a recent column, Stiglitz pointed to the oil industry as a particularly acute example.

“What we are seeing today is a naked exercise of oil producers’ market power,” Stiglitz wrote of rising energy prices earlier in February. “Knowing that their days are numbered, oil companies are reaping whatever returns they still can.”

But there’s plenty of pushback, both political and economic, to this perspective. A survey of a number of leading economists by the Initiative on Global Markets at the University of Chicago’s Booth School of Business showed that a majority of those surveyed — 67 percent — disagreed or strongly disagreed with the statement, “A significant factor behind today’s higher US inflation is dominant corporations in uncompetitive markets taking advantage of their market power to raise prices in order to increase their profit margins.” Only 7 percent of those surveyed agreed or strongly agreed with the statement.

“I don’t see the logic: U.S. markets have been concentrating for decades but high inflation is [less than] one year old,” Massachusetts Institute of Technology economist David Autor wrote in response to the survey.

Biden administration economic advisers, too, are disputing that message; as the Washington Post’s Jeff Stein reported on Thursday, messaging about corporate concentration leading to higher prices is currently a live debate within the administration.

President Joe Biden himself, under immense pressure to address inflation, has pointed out market consolidation in a few industries, but hasn’t gone so far as to blame it for the longer-term inflation the US is experiencing. “This isn’t a new issue,” Biden said last month. “It’s not been the reason we’ve had high inflation today. It’s not the only reason. But, over time, it has reduced competition, squeezed out small businesses and farmers, ranchers, and increased the price for consumers.”

But critics of major corporate price increases aren’t arguing that the consolidation is the only force driving inflation; rather, that because these conglomerates hold so much of the market share, they are able to raise prices out of step with the actual price increases they’re incurring and passing on to consumers — essentially, that they’re using the current inflationary environment as an excuse to raise prices more than necessary because they don’t have competitors to drive them to keep prices down, in turn contributing to the problem of inflation.

Corporations have high pricing power, driving higher costs and contributing to inflation

What is clear is that, “we’re in a highly unusual context,” Gregory Daco, the chief economist at EY-Parthenon, a global strategy consulting firm, told Vox. According to Daco, companies are currently being rewarded for price hikes with higher valuations and stronger revenues, so there’s little incentive for them to stop doing so, even if the prices aren’t justified by increasing costs to corporations.

Some price raises are to be expected; there are increasing costs to supplies, transportation, and labor, but consumers don’t have a way of knowing how those increased costs factor into price rises — and that’s something we’ll likely never figure out, Daco said.

“I think it’s nearly impossible to disentangle what is considered a natural, if we can put that word here, a natural outcome from the Covid crisis, from the massive injection of fiscal stimulus that led to very strong demand, or very strong demand and recovery, and the fact that supply was slower to come back,” Daco told Vox, “versus an environment where market concentration is exacerbating these price pressures, because a few dominating firms have the ability to do so.”

The inability to dismantle those two phenomena, though, is integral to the ability of certain businesses to continue increasing prices, according to Lindsay Owens, the executive director of progressive economic policy organization the Groundwork Collaborative and a former senior economic policy adviser to Warren.

“The preconditions for the price hikes we’re seeing today long predate the pandemic,” Owens told Vox via email. “Companies are able to take advantage of a crisis like the pandemic precisely because these foundations were set in place long before the crisis itself. And in corporate earnings call after corporate earnings call, executives are using inflation as a cover for egregious price hikes to boost their own profits.”

Daco echoed that sentiment, saying, “We are, I think, in a situation where market concentration is exacerbating inflationary dynamics.”

Warren has highlighted the meat industry as an egregious culprit, calling for a Justice Department investigation into the industry’s practices. “Tyson is abusing their corporate market power and raking in record profits by jacking up meat prices,” she tweeted earlier this month. “I’ve long argued that we need to enforce our antitrust laws to break up monopolies and promote competition, and now it’s more vital than ever as a tool to fight inflation.”

The Biden administration has also planned to inject $1 billion into smaller, independent meat processors to drive “meaningful competition” in the meat market, after a White House Economic Council analysis found gross profits of the top four meat processors soared 120 percent over the course of the pandemic.

“Capitalism without competition isn’t capitalism. It’s exploitation,” Biden said during the January unveiling of the plan. “That’s what we’re seeing in meat and poultry industries now.”

The only thing that will stop corporate price increases in the short term is if people buy less — one way or another

In the short term, corporate price hikes aren’t going anywhere so long as people are still willing to pay higher prices, Daco told Vox. “It’ll last and be sustainable as long as there is no pushback from consumers,” he said. “Essentially, if the price increases that are being passed on to consumers don’t weigh on demand, then businesses will continue to push up on prices.”

For the time being, that likely means the Federal Reserve will have to act to address inflation. Over the past year, the Fed has repeatedly signaled that the stimulus measures it put into place to aid in the recovery from the pandemic — buying up government bonds and keeping interest rates low — would have to be reversed to counter inflation and get it back to the central bank’s target rate, 2 percent.

Now, starting in March, the Fed is widely expected to start raising interest rates, with two more potential hikes coming later in the year, and even more by March of next year. That move tamps down on inflation by making credit — everything from mortgage payments to gigantic corporate loans — more expensive, thus decreasing purchasing power and demand. Slackening demand caused by a tightened monetary supply would send a fairly immediate signal to corporations that it’s time to arrest ongoing price hikes.

Other central banks, such as the UK’s Bank of England, have already begun to raise interest rates; Daco says the Fed is lagging because it was caught a bit off guard by just how much the Covid-19 pandemic affected the economy.

“I think the Fed was working under the impression that the pre-Covid world would return very rapidly — that we would very rapidly return to a world where the inflation dynamics would be fairly soft, therefore inflation would come back down toward 2 percent, where you would have ongoing labor market gains, where those would not stoke major inflationary pressures,” he told Vox. It’s clear now, he said, that the Fed needs to act — but very carefully.

“An excessively rapid or disorderly tightening of monetary policy could have more negative effects than desired,” Daco said. “In the end, what the Fed wants to do is essentially proceed to the so-called ‘soft landing’ of monetary policy, where it brings inflation back in line with its mandate; it needs to allow the labor market to grow, and the economy to move toward maximum employment — and [do] so without creating recession.”

Some Fed officials have echoed this sentiment recently, saying that a major initial rate increase isn’t warranted. And however interest rate increases proceed, Fed officials will have to weigh making a move that tightens the money supply across the board and decreases demand, without tightening so far and so fast that, for example, businesses decide they can’t afford to hire or keep workers on, leading to a recession.

That doesn’t completely negate concern about what Stiglitz calls the “supply-side” problems contributing to inflation — both in terms of fixing the supply chain and in terms of addressing corporate consolidation.

For example, Robert Reich, a former US Labor secretary, warned in a Guardian opinion piece on Sunday that, absent addressing anticompetitive behavior and other supply-side issues, “responsibility for controlling inflation falls entirely to the Federal Reserve, which has only one weapon at its disposal — higher interest rates,” Reich wrote. “Higher interest rates will slow the economy and likely cause millions of lower-wage workers to lose their jobs and forfeit long-overdue wage increases.”

Such fixes, however, would likely be a long-term project, while the Fed has the power to act now. And absent some action, corporations will likely continue to hike prices, because they have the ability and the desire to do so. As New York University economist Thomas Philippon told the New York Times last month, that’s because the current, unprecedented moment is just a manifestation of an underlying reality: “The firms were always greedy,” he said.