The non-inflated truth about inflation

Inflation! It’s dominating all economic news. It’s the main reason the stock market is going nuts. It’s what Fed officials are discussing in today’s meeting (they’re expected to raise interest rates several times over the next twelve months).

But in all of the inflated verbiage over inflation, there’s been little or no discussion about the role that large, hugely-profitable corporations are playing. Yet inflation is intimately connected to corporate power (as I discussed on this page last month).

Today I turn to the evidence, and then to what I believe should be done about corporate power and inflation.

First, to recap:

While most of the price increases now affecting the US and global economy have been the result of global supply chain problems limiting the availability of parts needed to make consumer goods, this doesn’t explain why big and hugely- profitable corporations are passing these cost increases on to their customers in the form of higher prices.

If corporations were competing vigorously against each other, they’d swallow these cost increases in order to keep their prices as low as possible — especially when they’re making huge profits. Yet corporations have been raising prices even as they rake in record profits. That’s because they face so little competition that they can easily coordinate price increases with the handful of other big companies in their industry. That way, all of them come out ahead — while consumers and workers lose.

As to the evidence, it’s all around us:

1.  Energy

Only a few entities have access to the land and pipelines that control the oil and gas still powering most of the world. They took a hit during the pandemic as most people stayed home. But they are more than making up for it now, limiting supply and ratcheting up prices. As Chevron Corp.’s top executive Mike Wirth said in September, “we could afford to invest more” in production but “the equity market is not sending a signal that says they think we ought to be doing that.” Translated: Wall Street says the way to maximize profits is to limit supply and push up prices instead, and we do whatever the Street wants.

2.  Consumer staples

Last April, Procter & Gamble raised prices on consumer staples like diapers and toilet paper, citing increased costs in raw materials and transportation. But P&G has been making huge profits. After some of its price increases went into effect, it reported an almost 25 percent profit margin. Looking to buy your diapers elsewhere? Well, good luck. The market is dominated by P&G and Kimberly-Clark, which—not coincidentally—raised its prices at the same time. 

Another example: Last spring, PepsiCo raised its prices, blaming higher costs for ingredients, freight, and labor. It then recorded $3 billion in operating profits through September. How did it get away with this without losing customers? Simple. Pepsi has only one major competitor, Coca Cola, which promptly raised its own prices. Coca-Cola recorded $10 billion in revenues in the third quarter of 2021, up 16 percent from the previous year.

3.  Food

Food prices are soaring. Half of those price increases are from meat. According to the latest data from the Bureau of Labor Statistics, meat prices were up 16 percent in November compared with the same month last year.

Why? Because the four giant meat processing corporations that dominate the industry are raising their prices and enjoying fat profits. A recent report from the White House’s National Economic Council finds that the largest meat processing companies are “using their market power to extract bigger and bigger profit margins for themselves. Businesses that face meaningful competition can’t do that, because they would lose business to a competitor that did not hike its margins.”

4. Fast food

Fast food giants like McDonald’s and Chipotle — incessantly complaining about higher food and labor costs — have increased their prices to consumers to cover these added costs. But they’re so profitable they could easily have absorbed these cost increases. (Wall Street analysts expect McDonald’s revenues hit a five-year high in 2021 and Chipotle’s revenues increased by over a third from two years before.) So why are they passing the cost increases on to their consumers? Because they have so much market power. (A few months ago, Chipotle’s chief financial officer admitted “our ultimate goal … is to fully protect our margins.”)

5.  Large retailers

A handful of giant corporations — Walmart, Amazon, Kroger, Costco, and Target —dominate retail sales in America. On a recent survey, over 60 percent of large retailers say inflation has given them the ability to raise prices beyond what’s required to offset higher costs.

6.  Corporate concentration overall

Since the mid-1980s (when the US government all but abandoned antitrust enforcement) two thirds of all American industries have become more concentrated. This includes banks, broadband, pharmaceutical companies, airlines, meatpackers, big tech, and consumer staples.

Corporations in these industries could easily absorb higher costs – including wage increases – without passing them on to consumers in the form of higher prices. But they’d rather maintain or enlarge their record profits by coordinating with other big players in the same industry and raise prices together.

As a result, their record profits are lining the pockets of major investors and corporate executives, while shafting consumers and workers (whose wage increases are being eroded by price increases).

What to do? Don’t slow the economy. Instead, reduce corporate concentration.

As I mentioned at the outset, the Fed meets today. It’s poised to try to control inflation by raising borrowing costs. This means the Fed will battle inflation the old way — drafting millions of workers into the inflation fight by slowing the economy and causing them to lose their jobs or wages, or both.

This is the wrong medicine for the wrong disease. It will hurt millions of people who are among the most vulnerable in the economy. The correct medicine is to reduce corporate market power.

Biden has started to try. He has prodded the Agriculture Department to investigate large meatpackers that are raising prices and underpaying farmers — while tripling their profit margins during the pandemic. He has encouraged the Federal Trade Commission to investigate accusations that large oil companies are artificially inflating prices, even after global oil prices began to fall in recent weeks.

In late October, the FTC ordered nine large retailers, including Walmart, Amazon and Kroger, to turn over detailed information to help root out the sources of supply chain disruptions that were “harming competition in the U.S. economy.”

Biden has urged the Federal Maritime Commission to root out price gouging by large shipping companies at the heart of supply chains. The Commission has investigated the handful of corporate shipping alliances that effectively control the flow of goods across the world’s oceans and which have raised prices as much as ninefold during the pandemic, according to data from the freight-tracking firm Freightos. 

In addition, Biden has tapped antitrust crusaders for key roles, including Lina Khan to be chairwoman of the Federal Trade Commission, and Jonathan Kanter (a long-time adversary of Facebook and Google) to lead the antitrust division of the Justice Department. And he has brought Tim Wu (a proponent of breaking up Facebook and other large companies) into the White House as a special adviser on competition issues.

All these initiatives are fine. But far more resources need to be aimed at the problem of corporate concentration. The Biden administration must declare economic war on monopolies and oligopolies.

Make no mistake. Taking on concentrated industries and corporate market power will be difficult. Corporate America will do whatever it can to keep its record profits and reduce its costs. In addition, antitrust enforcement is extraordinarily complex and time consuming. I directed the policy planning staff at the Federal Trade Commission in the Carter Administration and saw this firsthand.

But it’s worth the effort. Corporate concentration harms workers and consumers while rewarding CEOs and investors. Unless capitalism is made to work for everyone – unless the concentration of the American economy in the hands of a few giant corporations is reduced – inequalities of income, wealth, and power will continue to widen. And at some point, the system will break.

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