When you talk about inflation, definitely talk about corporate profits

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In the debate on the causes of recent inflation, some Democrats have pointed a finger at corporate profits: If profits are rising, doesn’t that mean that companies are deciding to raise prices? In response, some extremely savvy economists and pundits who like to pretend they’re experts on whatever’s being discussed have insisted that’s not the case. Inflation is complicated, for sure, but the Economic Policy Institute and the Brookings Institution are out with reports suggesting that, yup, corporate profits are a huge factor.

“Since the trough of the COVID-19 recession in the second quarter of 2020, overall prices in the [non-financial corporate] sector have risen at an annualized rate of 6.1%—a pronounced acceleration over the 1.8% price growth that characterized the pre-pandemic business cycle of 2007–2019,” EPI’s Josh Bivens writes. “Strikingly, over half of this increase (53.9%) can be attributed to fatter profit margins, with labor costs contributing less than 8% of this increase. This is not normal. From 1979 to 2019, profits only contributed about 11% to price growth and labor costs over 60%.”

Over half. Interesting, don’t you think?

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Here’s what that looks like:

And, Bivens notes, this data means that the traditional explanations for inflation many economists are proffering now should be taken with several grains of salt. “The historically high profit margins in the economic recovery from the pandemic sit very uneasily with explanations of recent inflation based purely on macroeconomic overheating,” he writes. “Evidence from the past 40 years suggests strongly that profit margins should shrink and the share of corporate sector income going to labor compensation (or the labor share of income) should rise as unemployment falls and the economy heats up. The fact that the exact opposite pattern has happened so far in the recovery should cast much doubt on inflation expectations rooted simply in claims of macroeconomic overheating.”

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At DC Report, Dean Baker draws a similar conclusion. “A popular line on our recent surge of inflation is that an over-tight labor market has led to rapid wage growth, which in turn forces companies to raise prices. Higher prices in turn lead workers to demand higher wages, which will give us a wage-price spiral and soon lead to double-digit inflation,” contrasting with today’s reality. 

Baker points out, “While this was a story that plausibly fit the data in the 1970s, it is very hard to make the wage-price spiral fit the current situation for a simple reason: The wage share of income has fallen sharply since the pandemic.” The wage share had recovered slightly since the Great Recession, until “we see a sharp reversal in 2021, with the wage share falling from 76.1% to 73.7%, a decline of 2.4 percentage points.” Baker does point to supply-side disruptions from the pandemic, rather than corporate profits, as the culprit in inflation. And Bivens, too, notes, “Non-labor inputs—a decent indicator for supply-chain snarls—are also driving up prices more than usual in the current economic recovery.”

The new report from Brookings looks at 22 major companies, finding that “across all 22 companies, the average real wage gain, factoring in inflation, was between 2% and 5% through October 2021. Unless these companies raised wages substantially since then, fast-rising inflation would have eroded most, or even all, of the 2% to 5% average wage gains. And at most, only seven of the 22 companies are paying at least half of their workers a living wage—enough to cover just their basic expenses.”

By contrast, those same companies made sure their shareholders did very well, spending five times more on dividends and stock buybacks than they did on paying their workers better. Directed to the workers who kept the companies running, that money could have made a big difference: “The 16 companies that repurchased nearly $50 billion of their shares could have raised the annual pay of their median worker by an average of 40% if they had redirected that money to employees.“ The overall effect of how these major corporations handled their finances during the pandemic was unsurprising: “Workers experienced the brunt of companies’ losses, while executives and shareholders generally avoided them.”

So when someone tries to tell you that it’s a simplistic, unsophisticated take to wonder if inflation might be linked to corporate profits … feel free to push back. It’s not the only story, and supply chain problems are a significant factor. But with corporate profits contributing more to rising prices than they had from 1979 to 2019, and with companies sending large piles of money back to shareholders and protecting executives from pay loss in the pandemic while giving workers stingy raises, no one who denies that corporations bear responsibility for rising prices and their effect on working people should be taken seriously.

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