Corporate Price Hikes Cause Inflation

 Corporate Profits Were 57% Higher Than Pre-Pandemic Years -- $857 Billion Higher 

(I added in mid April, 2023, a brief summary to the July, 2022, essay. My grievous complaints about the U.S. economy are summarized in the introduction -- just a note for any reader who would like to capture the essence of the mess our economy is in. Click the link at the right, July 2022) 

To continue: Corporate Profits Increased by at least 57% since pre-pandemic -- 

An added $857 billion in added costs to all households is $6,592 per household. My calculation derives from the Federal Reserve's Flow of Funds report, Table F.103, page 80, line one, "Profits before tax". Also one can look at  page 10, line 10, multiple years from 2015 to the present, March 2023, "Profits before tax, Domestic nonfinancial". Simply looking at page 10 at just 2 years 2020 through 2022, on the March 2023 report shows a huge 72% profit gain from $1.455 trillion in 2020 to a total profit of $2.507 trillion in Q2 of 2022. That's a 72% increase in 2 years, and an increase of profits of $1.052 trillion, which comes to an additional $8,092 per household of added expenses. But when I took the profits dating back to 2015 the increase is 57%. I adjusted for inflation and averaged the profits from 2015 to 2020 and compared them with profits from 2021 and 2022. 

This is the BEA graph for Domestic corporations, nonfinancial, from 2013 to 2022: 

Looks something like a hockey stick. Profits increased by $975 billion or 79%  -- which amounts to $7,500 more expensive goods and services for all households, on average. This is exorbitant, it is price-gouging and profiteering, it's immoral in a sense of taking advantage from a crippling situation. The Covid-19 pandemic caused a lockdown and 21.9 million workers were laid off work, lost their jobs, in the first two months from February to April, 2020. Other millions were placed on furlough without income, but still on the company employee roster. Gradually the workers, mostly low-income workers, regained their employment. The savings rate increased to an all-time high of 19% over a 12 month period, and when the vaccines came on the market, pent-up savings and demand created a surge of buying in a condition of broken supply chains. But the price mark-ups were not needed to the extent they created 78% higher profits. 

Added information, October 2023:  After reading a very informative article in the New Yorker magazine about Isabella Weber, professor at UMass/Amherst, I followed the link to a Federal Reserve study that claims that corporate profits amounted to 58% of inflation over the past 2 years. To quote: "markup growth was a major contributor to inflation in 2021. Specifically, markups grew by 3.4 percent over the year, whereas inflation, as measured by the price index for Personal Consumption Expenditures, was 5.8 percent, suggesting that markups could account for more than half of 2021 inflation." Divide 3.4 by 5.8, it = 58%.   

Wage growth or "average weekly earnings for production and nonsupervisory workers" has increased by 1.5% in 3 years, pre-pandemic (from February 2020 to February 2023). This is very slow wage growth but at least it is positive. The non-supervisory workers are 80% of the full-time workers and 83% (or 134 million) of all workers (160 million). Their very modest gains in weekly income are not driving inflation; mostly price-gouging corporations are causing inflation. 

Here's the Fed's Fred graph for pre-tax nonfinancial corporate profits, 2013 to 2022. 

You are looking at a 106% profit change from Q2 2019 to Q2 2022. 

How do you account for it? 

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I try to show how much higher the total profits were in 2021 and 2022 in comparison with the six years previous, 2015 to 2020. The (1) Flow of Funds report tightly corresponds with the (2) Bureau of Economic Analysis report, BEA.gov, Interactive Table 6.16D, "Corporate Profits by Industry", line 13. Both sources correspond with the (3) Fed's FRED graph "Nonfinancial corporate business: profits before tax". Corporate profits definitely have jumped significantly higher.   

The incomplete and short story is that American corporations raised their prices in response to the pandemic supply-chain shortages, and coupled with the pent-up savings accumulated in the Covid lockdown period, and, moreover, workers' wages income surged --- not noting that wages then fell back to their pre-pandemic trajectory, and finally the enormous "economic impact payments" from the Federal government all led to very high inflation. 

But that story fails to report that corporations then tacked on an extra charge just to maximize their profits. See the graph below. We needed an excess profits tax to curtail this Profiteering. But we did not even get a clear explanation of the causes of the inflation; instead the excess profits story has been hidden from the public. In the essay below here I show numerous graphs of the profit excesses. I'll repeat the one for "nonfinancial corporations" and the next for "wholesale trade". The seventh graph below, for "retail trade" resembles a hockey stick.

Wholesale trade increased their profits by 75% in two years. Retail trade as well had enormous excess profits, increasing profits by 115% in two years, from $160 billion to $342 billion (see the graph below). 

Did households earn on average an additional $6,592 since 2020? No. The median household income in real inflation adjusted terms dropped by $2,000, from $72,808 to $70,784 between 2020 and 2021. Meaning that household income increases could not possibly be driving inflation.  

The Fed's graph shows declining real median household income in the last two years, and it shows a real gain at the median of just $4,536 since 2000, 7% increase over a 22 year period. In contrast the "Disposable Income per capita" shows a gain of 35%, from $33,645 to $45,411.  

Now the "real disposable income per capita": 

And lastly, in chained dollars, the median weekly income for wage and salary workers (encompassing 80% of all workers) rose by 9% in the last 22 years (note the spike during the pandemic, and it quickly returned to the normal growth level as low income workers returned to employment): 

Average profits of the 6 previous years, from 2015 to 2020, for nonfinancial corporations were $1.493 trillion (inflation adjusted), and for the two year period, 2021 and 2022, they averaged $2.350 trillion -- an increase of 57%. But "real median household income" dropped by 3% from 2019 to 2021.  

The data comes from the Federal Reserve's Flow of Funds report, multiple years, Table F.103, "Nonfinancial Corporate Business", line one "profits before tax". 

 I also looked at after-tax profits (Table F.3, Distribution of National Income, page 10), multiple years, line 10, Domestic nonfinancial. In this case the yearly profits for both 2021 and 2022, the combined average, was 45% higher than the six previous years. 

Households, families and consumers had to pay the pre-tax profit in the cost of their expenses, the $857 billion extra profits. Each household of the 130 million households paid an average of $6,592 more than the average they paid in the six previous years. The main question is "How could they afford it?".

 The answer is "Many could not." The ALICE report from the United Way details how many had trouble paying normal expenses, it comes to between 32% and 50% depending on the question asked. Their 2022 report cites a Federal Reserve study that asks, "Question: Suppose that you have an emergency expense that costs $400. Based on your current financial situation, how would you pay for this expense?" Only 55% of American adults said they could pay it off immediately, the other 45% would have to put it on the credit card, borrow, sell something, or "not able to pay". Additionally, some 20% say they have difficulty paying for food, 30% have difficulty with housing costs, and 46% do not have a "rainy day" savings equivalent to 3 months of income. This is a nation with a per household average income of close to $170,000/year. The Fed's Flow of Funds report states the "National Income" is $22.046 trillion, Q4 2022, which divided among 130 million households yields an average of $169,584. Yet, 45% can't pay a $400 expense within 30 days, they have to put it on a credit card, etc., etc.. 

The next post is my major effort to explain the inflationary pressures in the economy, mostly the role of corporations raising prices for added profit, as documented in other studies and more graphs from the Federal Reserve. 

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Added note on inflation, September 2, 2023

This graph comes from the Fed's FRED graphs, an article by Christian Zimmerman who explores the idea that the price of Shelter has been the driver of inflation from June 2022 to June 2023, 12 months. It's conclusive that the price of shelter rose by 8.0% and the price for all else rose by 0.5%. Here's the graph: 

The graph Zimmerman uses goes from May 2021 to January 2023, so I pulled out the tab to the July 2023. It's clear that the red line is flat, and that shows inflation without shelter. The blue line shows shelter inflation. What has been driving inflation between June 2022 and June 2023? Shelter. 

The BLS also has database showing inflation increases, see here. It shows total inflation increased by 3.0%, June to June, and shelter increased by 7.7%. But as I said inflation without shelter increased by 0.5%. 

This BLS Economic News Release states for July 2023, "The index for shelter was by far the largest contributor to the monthly all items increase, accounting for over 90 percent of the increase, with the index for motor vehicle insurance contributing." 

Housing expenditures were 33.8% of all household expenses, states this BLS document. Shelter costs are the largest component in the list of expenses.