The first rule of inflation is that it initially hits businesses, then quickly makes its way to consumers in the form of higher prices. The second rule is that big businesses can weather all of this a lot better than everyone else, because they have the buying power to get deals from suppliers — and the market power to hike prices more than they really need to.
That explains why large corporations have been logging record profits even during the highest inflation environment in four decades.
Earnings for the 2021 fourth quarter were expected to rise more than 22% for S&P 500 companies, CNBC reported, citing data from Refinitiv. That was a fitting end to a year when overall earnings for the year were up nearly 50% despite inflation that hovered near 7% as 2021 came to a close.
The strong Q4 showing followed a third quarter that saw U.S. corporations record more profits than ever before, according to Bloomberg. This was not just in terms of dollar figures either, which is not uncommon, but also in terms of total share of the U.S. economy. Estimates from the U.S. Bureau of Labor Statistics found that Q3 after-tax corporate profits equaled 11% of gross domestic product, shattering the previous record of 10.6% set during the first quarter of 2012.
Meanwhile, data from the U.S. Commerce Department show that corporate profit margins are the highest they’ve been in 70 years, NPR reported.
So, what’s the magic formula? Much of it comes down to this: big corporations raised prices above inflation and saw no slowdown in business because of it.
“What we have seen is that profits are skyrocketing, which means that companies have increased prices by more than cost,” Isabella Weber, a professor of economics at the University of Massachusetts-Amherst, told NPR. “In the earnings reports, companies have bragged about how they have managed to be ahead of the inflation curve, how they have managed to jack up prices more than their costs and as a result have delivered these record profits.”
About four out of five companies surveyed by the Richmond Federal Reserve last year said they raised prices to cover at least some of the higher input costs they faced, Business Insider reported.
But many pushed those prices above their own costs. In fact, more than half of the companies surveyed by Digital.com said they hiked prices beyond what was required to offset their own higher input costs. Big companies were more likely to do this than small businesses, the survey found.
This hasn’t gone over well with certain U.S. lawmakers, including President Joe Biden. As Weber told NPR, Biden noted that even as prices for unfinished gasoline fell by 5% late last year, prices at gas stations rose by 3%.
“So in other words, companies that are selling gas at the gas station … are not handing down the price decrease that they had enjoyed in November,” she said. “This was the argument of the president. So, yes, the president has to step in. How exactly to do it is beyond my expertise as an economist.”
More From GOBankingRates