It’s not just inflation that’s driving up prices. Some corporations are using inflation as an excuse to raise prices, and some CEOs openly admit it.
While inflation is increasing at the fastest rate in 40 years — up 8.3 percent in August 2022 and 8.5 percent in July — corporate profit margins seem to be eclipsing the inflation rate.
Aggregate corporate profit margins improved to 15.5 percent in the second quarter compared to 14 percent in the first quarter — their highest level since 1950. Gross corporate profits jumped by $175.2 billion in the second quarter after tax, exceeding $3 trillion for the first time in history.
William Meaney, the CEO of Iron Mountain Inc. — an information management and data center company and a member of the S&P 500 — told Wall Street analysts at a Sept. 20 investor event that high inflation over the past few years helped the company increase its margins.
Meaney said he has been doing his “inflation dance praying for inflation” for years, The Intercept reported.
On a 2018 earnings call, Meaney told participants that “it’s kind of like a rain dance, I pray for inflation every day I come to work because … our top line is really driven by inflation. … Every point of inflation expands our margins.”
Meaney said his company has increased its prices at a greater rate than the high recent rates of inflation, which “obviously covers our increased costs, but … a lot of that flows down to the bottom line.” It’s not just his company, he added. “People are seeing what FedEx, UPS, and others are having to do to actually manage their business and pass on that inflation.”
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Meaney acknowledged that inflation may not be good for everyone. “I wish I didn’t do such a good dance,” he said.
Black families will suffer the worst effects of inflation because they lag behind whites in income, wealth, savings and home ownership. Necessities such as food, electricity, and cellular service make up a larger share of Black families’ budgets, according to a study published by the Federal Reserve Bank of Minneapolis.
The wealth gap leaves many Black Americans without the funds to help offset the rising consumer prices and puts more pressure on their monthly income, economists said.
When a shock like the pandemic hits the U.S. and its supply chain and economy, “it is going to hit us a lot harder,” said economist Nicholas J. Hill, the Dean of the School of Business at HBCU Claflin College in Orangeburg, South Carolina. “It’s worse for Black-owned businesses.”
Federal Reserve Chairman Jerome Powell has stated that his goal is to drive down wages and inflation. “In other words, Powell wants regular workers to make less money, which would lower labor costs for businesses,” wrote Jon Schwarz and Ken Klippenstein for The Intercept.
That sounds like it would increase profits for companies.
Many Democrats hope the recently signed Inflation Reduction Act (IRA) will help keep corporate profit margins in check with its new minimum tax on corporations with $1 billion+ in income reported on financial statements before tax credits and depreciation.
“Big corporations posting record profits when families are stretching their budgets are finally going to pay their fair share under the new minimum tax for billion-dollar companies,” said Senate Finance Committee chairman Ron Wyden (D-OR) in a statement to Yahoo Finance.
Former U.S. Labor Secretary Robert Reich called for the profit gains from “excessive corporate power” to be reigned in.
“The inflation we are now experiencing is not due to wage gains from excessive worker power,” Reich wrote in an opinion piece for The Guardian. “It is due to profit gains from excessive corporate power. It’s profits, not wages, that need to be controlled.”
Reich, who served in the Clinton administration, works as a professor of public policy at the University of California at Berkeley.
“Profit-price inflation” — caused by companies “raising their prices above their increasing costs” — is the key factor fueling inflation, Reich wrote.
Some economists are concerned that the Fed will go too far in its effort to slow inflation with higher interest rates, causing unnecessary pain for U.S. workers. Others predict that pandemic supply chain delays and excess demand will normalize without interest rate hikes. Others argue that high inflation is worth it if it means avoiding a recession and job losses. Reich is in the school that believes reducing record-high corporate profit margins is the best way to slow inflation.
“Congress and the administration need to take direct action against profit-price inflation, rather than rely solely on the Fed to raise interest rates and put the burden of fighting inflation on average working people who are not responsible for it,” Reich wrote.
Reich argues that since pay increases mostly haven’t kept pace with inflation, wages are actually “reducing inflationary pressures.”
“This is why corporate profits are close to levels not seen in over half a century,” he wrote. “Corporations have the power to raise prices without losing customers because they face so little competition.”
The Federal Reserve projects close to a 1 percent increase in unemployment in 2023 — that’s more than 1 million people out of work — after increased interest rates.
“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” Powell said in a recent speech. “These are the unfortunate costs of reducing inflation.”
Images: William Meaney, president and CEO of Iron Mountain, thumbnail image from https://www.ironmountain.com/about-us/leadership / Screenshot from CBS News video graph, https://www.cbsnews.com/news/greedflation-is-corporate-profit-taking-driving-prices-higher/