As winter gives way to spring, many changes are afoot: birds are chirping, flowers are blooming, and influential and powerful people are finally acknowledging that corporate profiteering is playing a role in inflation.
From the start, left-leaning economists, news outlets, and politicians have argued that corporate price gouging has spurred our current cost-of-living problems — that firms weren’t just passing on their own higher costs to consumers, but using the many headlines about inflation to mark up prices more than necessary and quietly make a tidy profit. This was largely dismissed by establishment voices as a left-wing excuse to bash corporations, even as corporate profits soared to record levels and executives explicitly told investors that this is exactly what they were doing.
But as is so often the case, what was once a supposedly fringe, kooky left-wing position is now being recognized as reality. Take last month’s testimony from Federal Reserve chair Jerome Powell. Asked by Senator Chris Van Hollen, a Maryland Democrat, if workers’ wages and benefits could keep growing steadily in a scenario where inflation was tamed and corporate profits fell, Powell replied that this was possible “in the shorter term.” It was a major admission: Powell’s anti-inflation strategy has been explicitly to “get wages down,” yet here he was saying that wages could keep growing if the country was to get out of its inflation woes — as long as the current sky-high corporate profits took a hit.
This comes after comments in January from then Fed vice chair Lael Brainard that “wages do not appear to be driving inflation in a 1970s-style wage-price spiral,” and that “retail markups in a number of sectors” are creating what might be called “a price-price spiral” instead. (Brainard is now the head of President Joe Biden’s National Economic Council). That month also saw the release of a Federal Reserve Bank of Kansas City paper that concluded that “markup growth was a major contributor to inflation in 2021,” being responsible for as much as half of that year’s inflation rate.
This seems to be taking hold in Europe, too. Reuters reported that in February, twenty-six European Central Bank (ECB) officials gathered at a retreat in Finland to discuss the matter, with more than two dozen slides’ worth of data presented to the group showing that company profits were growing bigger and bigger and were also outpacing wage growth, partly thanks to firms’ ability to set prices. Since then, a host of European policy makers have made similar points publicly, including ECB president Christine Lagarde and Bank of England governor Andrew Bailey.
At a March speech in Frankfurt, ECB executive board member Fabio Panetta warned that “opportunistic behaviour by firms could also delay the fall in core inflation,” and that “some producers have been exploiting the uncertainty” created by inflation to pump up their profit margins. “We should monitor the risk that a profit-price spiral could make core inflation stickier,” he urged.
Later that month, ECB economists noted the unusual fact that business profits were still going up despite a cyclical economic slowdown, arguing that the cost rises companies were facing in making their products “also made it easier for firms to increase their profit margins, because they make it harder to tell whether higher prices are caused by higher costs or higher margins.” They concluded that “the effect of profits on domestic price pressures has been exceptional from a historical perspective.”
This seems to be recognized across the continent. The central bankers of Poland, Hungary, and the Czech Republic have recently made the same points as these ECB officials, cautioning that “price hikes exceeded cost rises in several sectors” and had contributed to inflation, and promising to watch for a “profit-inflationary spiral.”
Even economists at profit-driven investment banks are sounding the alarm. “Today’s price inflation is more a product of profits than wages,” UBS Global Wealth Management chief economist Paul Donovan wrote in November, charging that firms had “taken advantage of circumstances to expand profit margins.”
More recently, in April, Albert Edwards, global strategist at Société Générale, France’s third largest bank, expressed disbelief at the “unprecedented” and “astonishing” ways that big business had used the inflation-driving disruptions of the past few years as an “excuse” to run up “super-normal profit margins.” Calling for price controls, he warned that this behavior, coupled with the way ordinary workers are being made to foot the bill for these excesses, could “inflame social unrest” and lead to “the end of capitalism.”
Senators Bernie Sanders and Elizabeth Warren have put forward bills to hold down firms’ price hikes and claw back their resulting profits. But because discussing the role of corporate price gouging in the inflation crisis has been rendered virtually taboo the past few years, and because the Fed’s limited tool set only lets it attack workers’ wages instead of firms’ profits, these ideas haven’t gotten much traction. Instead, the US central bank is persisting with a strategy that its own staff are predicting will tip the country into recession.
If and when that happens, we’ll no doubt see an uptick in the popular anger Edwards warns about, especially if that downturn is met with more bailouts for the rich while workers are once more told to grit their teeth and make do with scraps. The jury’s out on whether the second part of Edwards’s prediction will come true — but the Federal Reserve sure seems dead set on finding out.