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Inflation continues to be a top concern for American voters. The rising cost of living is impacting hard-working people across the country. Government policies certainly played a role in rising inflation, but unfortunately so did corporate greed.
Inflation has unexpectedly risen for the last two months. It has declined from its rapid pace in 2022 but is stuck around 3% currently. Despite this, wholesale prices remained steady or decreased. Why is this?
Corporations Caused Half of Inflation
Former Labor Secretary Robert B. Reich told a House committee on May 7, 2022. “They [corporations] are passing these costs on to consumers in the form of higher prices … because they can. And they can because they don’t face meaningful competition.” A recent study by Groundwork Collaborative gives us some insight into this problem. The study analyzed data from the Commerce Department and found that corporations caused 53% of price growth in the second and third quarters of 2023.
Historically High Markups
In 2021, as inflation hit an annualized rate of 5.8%, researchers at the Federal Reserve Bank of Kansas City determined that corporate markups increased by 3.4%. They concluded markups were responsible for over half of inflation. In 2021, the average markup was 72% above the marginal cost. That’s the highest in history.
The Perfect Opportunity
“Publicly reported supply chain bottlenecks and cost shocks….serve to create legitimacy for price hikes and create acceptance on the part of consumers to pay higher prices,” wrote Isabella M. Weber and Evan Wasner in their study on the subject. They examined price hikes at various companies and correlated them with public statements from their executives, suggesting that factors such as the pandemic, the war in Ukraine, and similar events allowed them to increase prices without facing significant backlash from consumers.
In Their Own Words
“It’s a constructive market for pricing,” Dupont’s CEO Edward D. Breen said in February 2021. Clearly, corporate chief executives aren’t trying to keep any of this a secret. Pepsi’s Chief Financial Officer Hugh Johnston said in April 2021, “The environment is well set up for pricing to be positive going forward.” When talking about reacting to inflation with price hikes, Tyson’s chief operating officer said “I think we will be quite successful in this endeavor.” Tyson has since raised prices by 31.7%.
The most extensive analysis of this topic to date, conducted by the Institute for Public Policy Research and Common Wealth, examined 1,300 companies spanning four continents. The study concluded that a relatively small group of companies engaging in profiteering played a significant role in elevating consumer prices beyond what would have occurred solely due to supply-chain shocks.
Inflation Without Corporate Markups
Speaking to Fortune.com, Pancotti said corporate profits are “probably why we saw inflation in the realm of 7% to 9% for a while, instead of the 5% to 7% range….now we’re in the 3% range, if you took corporate profits away, we should already be at the 2% target.”
Why Is This Happening?
The primary goal of corporations is profit, as they are driven by a responsibility to maximize shareholder value. This profit-driven motive incentivizes businesses to make decisions to increase revenue and minimize costs. If they can get away with charging more for a product or service, they will.
Corporate profits are at all-time highs, up 600% over the last century. The widening gap between corporate earnings and the average worker’s income has contributed to income inequality.
Beyond economic implications, the prevalence of corporate practices such as greedflation and historically high markups raises ethical concerns. The pursuit of exorbitant profits at the expense of consumers’ financial well-being challenges the moral responsibility of corporations.
Why It’s Important
Inflation negatively affects people by eroding their purchasing power. As prices rise, the value of their earnings diminishes, making it challenging for individuals to maintain their standard of living. Inflation causes an increased financial burden on households and impacts their overall well-being.
Government Intervention and Policy Reform
Examining the potential impact of government intervention and policy reforms is essential in addressing the challenges posed by corporate practices contributing to inflation. Implementing effective policies, such as tax incentives for responsible corporate behavior or penalties for price gouging, can shape a regulatory framework that aligns profit motives with broader societal interests.
While already in place to some degree, implementing and enforcing more regulations that prevent price gouging and ensure fair pricing practices could help the situation. Regulatory bodies can monitor and penalize corporations engaging in unjustified price increases.
One option to consider is price controls to stabilize prices and protect consumers from unfair practices. Price controls promote social equity by preventing price discrimination and ensuring that all consumers, regardless of their economic status, can access goods and services without facing exploitation. This stability fosters consumer confidence and helps maintain a steady standard of living.
Enforcing antitrust laws prevents monopolies and oligopolies, ensuring that a diverse range of businesses operate in the market. This competition restrains the ability of corporations to wield excessive pricing power.
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Sam Whisnant is a college student with a talent for writing and a natural curiosity about the world. He combines his academic pursuits with a passion for sharing knowledge in a way that is both informative and engaging to his readers.