The window is closing on corporate 'greedflation.' It's another sign that inflation is cooling off.
- Many companies have reported record profits over the past year.
- It's led some economists and politicians to accuse companies of fueling inflation.
"US profit margins surged after the recession. That is normal," stated a note from Albert Edwards, global strategist for Societe Generale. "What has not been normal," Edwards added, "is that margins did not suffer their usual cyclical decline in the 2020 recession."
"Greedflation" — the idea that companies are using inflation as an excuse to raise prices and boost profits — could be part of the explanation.
"Companies have passed higher costs on to customers. But they have also taken advantage of circumstances to expand profit margins," said UBS Chief Economist Paul Donovan.
The following chart shows corporate profits after tax as a share of US GDP. Profits have not only risen over the past decades, but have remained elevated since the pandemic began.
Raising prices, however, might not be enough to save businesses from the economic reckoning that could be on the horizon next year.
"The squeeze is going to take its toll and the window of easily passing on cost increases to end consumers is passing," Craig Erlam, senior market analyst at OANDA, previously told Insider.
While inflation has recently slowed, it remains elevated. The Federal Reserve looks poised to continue raising interest rates to tamp it down, albeit perhaps at a slower pace than the current cycle of rate hikes that started in the spring. As elevated interest rates flow through the economy — and a possible recession looms next year — most global CEOs expect their businesses to take a hit.
CEO confidence fell to its lowest level since the Great Recession going into the fourth quarter, according to a survey from The Conference Board. Only 5% of CEOs surveyed said "they expected economic conditions to improve over the next six months," per a press release.
To what extent soaring corporate profits are to blame for high inflation remains uncertain, but as inflation slows down, the negative CEO sentiment suggests some companies' profits are set to fall as well.
Some politicians and economists say record profits are fueling inflation
In early November, Sen. Bernie Sanders wrote the "economic crisis isn't inflation, it's corporate greed," while President Joe Biden threatened to impose a windfall tax on energy companies whose profits were "so high, it's hard to believe." After Democrats' strong performance in the midterm elections, Senator Elizabeth Warren said it was a sign voters agreed corporations had been "driving up inflation."
"Candidates up and down the ticket called out price-gouging, from Big Oil to grocery chains — and they won," she said.
A November House of Representative Subcommittee on Economic and Consumer Policy report pointed to "massive increases in profits between 2019 and 2021" and said "certain corporations began enjoying record profits and profit margins — and continue to do so today."
Even the Federal Reserve may be beginning to take notice.
In September, Federal Reserve Vice Chair Lael Brainard said retailers' profit margins "have risen significantly more than the average hourly wage that retailers pay workers."
The note from Societe Generale's Edwards stated that while Brainard was "never going to use the words price gouging or greedflation," he suspected she was alluding to this.
"My translation is 'We have noticed economy-wide and especially bloated retail margins as a source of rapid inflation and we are going to crush that trend by killing demand.' No wonder US CEO confidence has collapsed despite record margins."
CEOs project customers will start pulling back their spending and that will cut into profits
During earnings calls over the past year, many CEOs have bragged about their ability to "raise prices even more than necessary to cover costs," the House Subcommittee report found. But their tune is beginning to change.
While many corporations reported strong earnings in recent weeks, company executives made their thoughts about the future of the economy abundantly clear. The consistent theme: There are already signs of slowing consumer spending, and it could slow further as inflation continues to take its toll.
Walmart CEO Doug McMillon echoed a similar theme, saying inflation "has a cumulative impact on our customers, especially for those that are most budget-conscious, and so we're focused on bringing our costs and prices down as quickly as possible by item and category."
Just as the rising prices associated with rising profits can hurt consumers, however, falling profits — if they plummet enough — could potentially lead to layoffs. For now, despite high-profile tech layoffs at companies like Meta and Twitter, unemployment claims remain near historic lows. However, the Federal Reserve's projections suggest this won't last forever.
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