How concentrated corporate power makes inflation worse

 How concentrated corporate power makes inflation worse

Judd Legum Nov 10 

Why are prices from everything from laundry detergent to potato chips to My Little Pony going up? Inflation is a complex phenomenon. Supply chain disruptions, increased labor costs, and surging demand all play a role. But one factor driving inflation is seldom discussed: mega-corporations with massive market power. 

In competitive markets, profit margins should approach zero, as long as there are reasonable substitutes available for a given product. But corporate profits as a share of the American economy have risen dramatically over the last two decades, from 5% of GDP to nearly 12%.

As prices have increased in recent months, corporate profits have surged to record highs, according to data from Bloomberg:

Faced with rising prices for everything from lumber to oil to labor and computer chips, chief executive officers have cut costs and boosted prices for their products. The strategy appears to be working, with first-quarter income from S&P 500 companies jumping five times as fast as sales, data compiled by Bloomberg Intelligence show.

As a result, their net margin -- which measures how much profit companies are squeezing from their revenue -- has risen to a record high, according to Bank of America Corp.

...“To a fundamental analyst, inflation is called ‘pricing power,’” said Nicholas Colas, co-founder of DataTrek Research. “And it is very good for incremental corporate earnings.”

As Colas alludes to, corporations are not being forced to raise prices to stay afloat. They are choosing to raise prices to maintain large profit margins because they have enough market power to do so without losing customers.

Let's take Procter & Gamble (P&G), one of the largest consumer product companies in the world, as an example. In April 2021, P&G announced that it "will start charging more for household staples from diapers to toilet paper, the latest and biggest consumer-products company to announce price hikes." To justify the increases P&G cited "rising costs for raw materials, such as resin and pulp, and higher expenses to transport goods." The price increases, P&G said, will "be in the mid-to high-single-digit percentage points." 

In the fiscal quarter ending March 31, 2021, P&G reported an "operating income," or profit, of $3.785 billion. That represented a 20.9% profit margin compared to total sales. In the fiscal quarter ending September 30, 2021, after some of P&G's price increases went into effect, the company reported a profit of $5.06 billion. That represented a profit margin of 24.7%. The company spent $3 billion in the quarter buying its own stock. 

It's clear that the price of Pampers and Tide cannot be explained by "rising costs for raw materials" or transportation alone. Rather, the price increases were necessary to maintain — and even increase — large profit margins. 

But how can P&G get away with selling diapers at a huge margin? Shouldn't competitors in the diaper industry undercut P&G on price and grab market share? Unfortunately, there isn't much competition in the diaper market. "The lion’s share of the market for diapers meanwhile is controlled by just two companies (Kimberly-Clark and P&G), limiting competition for cheaper options," according to a report released this month from the Roosevelt Institute. Kimberly-Clark, which produces Huggies and Pull-Ups, announced similar price increases at the same time as P&G. 

Data provided to Popular Information by Accountable.us told a similar story across a range of industries. Corporations that are raising prices are also amassing huge profits and spending billions of stock buybacks. While a variety of factors are at play, insufficiently competitive industries have stripped consumers of bargaining power. 

The costs of these price increases are often borne by those who can least afford them and the benefits go to wealthy shareholders and executives. "[A]cross a range of sectors that produce the goods that people need to provide for their families, companies are extracting from their consumers using the excuse of inflation -- all while lining their shareholders' and CEO's pockets," Rakeen Mabud, Chief Economist at the Groundwork Collaborative, told Popular Information. "This has nothing to do with inflation, and everything to do with corporate greed by those who are focused on enriching themselves at the expense of workers and families."

Other major brands announcing price increases and large profits

In April, PepsiCo — the parent company of Frito-Lay, Gatorade, Quaker, Tropicana, and other brands — announced it was increasing prices. The company blamed "higher costs for some ingredients, freight and labor." 

In July, the company announced its "pricing was up about 5% in the North America businesses." Those price increases supported better than expected performance. The company recorded $3 billion in operating profits and increased its projections for the rest of the year. The company expects to send $5.8 billion in dividends to shareholders in 2021. 

PepsiCo's chief competitor, Coca-Cola, took a similar approach. The company — which owns Dasani, Powerade, Minute Maid, and Fairlife — announced in July that it "plans to raise prices." These price increases were good for business. The company recorded $10 billion in revenues (up 16% from the previous year) and increased its profit margins to 28.9%. Coca-Cola has over $11 billion in cash reserves. 

The trend extends beyond the food industry. Whirlpool — which owns Kitchenaid, Maytag, Amana, and other appliance brands — increased prices 5 to 12% in 2021. The purpose of the increase, announced in July, was purportedly to "compensate for increased raw material costs, including for steel and plastics." In the 3rd quarter, however, Whirlpool announced profits of $608 million and revised its estimates for profit margins moving forward — from 10% to 11-12%. While the price increases were billed as offsetting raw material costs, they ended up increasing profit margins significantly. 

Numerous other companies that announced price increases to compensate for increased labor and material costs are reporting large profits, including Conagra, Hasbro, and Chipotle.

In June, two of the nation's largest supermarket chains, Kroger and Albertsons, said "that they expect to benefit from rising prices." According to retail analyst Burt Flickinger, the stores will "mark up the full rate of inflation plus a little bit more." Kroger CEO Rodney McMullen was quite open about his intention to exploit inflation to increase profits. "A little bit of inflation is always good in our business," McMullen said.