Businesses passing high costs onto consumers at the fastest rate since the 1950s

  • Profit margins and corporate profits hit record highs in 2021, researchers at the Roosevelt Institute have found.
  • Businesses charged on average about 72% more than their input costs.
  • Reversing that surge is one way policymakers can help calm inflation in the United States, the researchers said.

Several factors, from Russia’s invasion of Ukraine to supply chain issues, are fueling today’s skyrocketing inflation. Yet new research from the Roosevelt Institute reveals that the blame lies with American corporations, and corporations are charging Americans the most they have ever done.

Inflation is closely tied to rising business prices, starting with an increase in costs that go into business operations, ranging from more expensive materials for manufacturers to higher rents for retailers. Affected firms then raise consumer prices to compensate for these more expensive inputs. The differences between price and cost are known as mark-ups, and in the pandemic-era economy, these differentials are wider than ever.

Profit margins and earnings at 3,698 U.S. companies soared last year to the highest levels since the 1950s, Mike Konczal and Niko Lusiani of the Roosevelt Institute said in a June statement. The average markup reached 1.72 in 2021, meaning that the typical price offered by businesses to their customers was 72% above business costs. This is up from an average of 1.56 in the 2010s, or 56% above marginal cost.

Last year also boasted the largest annual increase in margins since at least the 1950s, the period for which the duo conducted their analysis. The rise was more than 2.5 times larger than the other largest annual increases seen before.

This transfer of higher costs has helped drive inflation to levels not seen in four decades. The consumer price index – a closely watched national measure of inflation – climbed 8.6% in the year to May, beating economists’ forecasts and marking the pace fastest price growth since 1981.

The measure was largely boosted by soaring gasoline prices, but the report also showed lingering inflationary pressures in nearly every corner of the economy. With global supply chains still far from healed and gas prices rising further in June, hopes of a cooling are largely dashed.

The researchers’ findings may be specific to the inflation seen throughout last year, but the lack of a slowdown in 2022 suggests there is opportunity for relief, the team wrote.

“With margins being abnormally and suddenly high, this means there is room for them to reverse with little economic damage and with likely societal benefits,” Konczal and Lusiani said in the brief.

Konczal told Insider that inflation in 2022 was different from last year, calling it “wider and a bit more persistent than it was in 2021.”

“Having said that, the big margins in these companies are still there and they need to come down, or at least if they come down, if those profit margins come down, that would help ease the pressure of inflationary pressures,” he added.

The


Federal Reserve

is the primary body tasked with curbing inflation, but the researchers highlighted several options that Congress could pursue if lawmakers wanted to tackle price hikes at the corporate level. Antitrust “cures” can better match supply and demand in a more “targeted and nuanced” way, Konczal told Insider, citing the cost of prescription drugs as an example.

Moreover, “higher margins do not necessarily have to translate to higher profits” as they did last year, the authors wrote. They suggested that an excess profits tax could be a solution to “distribute uncontrollable economic gains” while “eroding” the pressure on companies to increase margins.

The situation may look “bleak” to policymakers, Konczal told Insider, but targeting industry concentration can counter soaring margins.

“How the business sector evolves over the next two years — whether or not prices fall, especially for many goods — will largely determine the trajectory of the economy,” Konczal said.

“Whether [policymakers] end up hoping that the Federal Reserve will solve this problem, it will probably lead to a bad result or a worse result than if other options were also in play.

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