Andy Larsen: How much of price inflation is due to corporate greed?

Inflation has been extremely annoying to me.

This is not a hot take, but it’s worth stating here. The process of going to a store, or restaurant, or purchasing a service, or paying rent and finding that it’s now significantly more expensive than it used to be is no fun whatsoever.

In recent months, inflation has certainly slowed, but we haven’t yet seen any deflation — in other words, the higher prices we got over the past couple of years are still here, and look like they’re here to stay.

Why exactly did we get so much inflation? I’m not sure there’s a more heavily studied or debated question right now. Last week, another major study came out about the topic, this one from the United Kingdom. Its finding? That excess corporate profit-taking contributed significantly to worldwide inflation. Indeed, there’s a catchy name for the phenomenon: greedflation.

But there are very smart and significant people who totally disagree. They largely attribute inflation to government fiscal policy during the pandemic, along with normal supply-and-demand driven price changes.

So who’s right? I decided to look into the topic. Before coming to conclusions, I thought of a few basic questions I’d want to see the evidence on.

Are CEO wages rising higher than inflation?

One quick test: are CEO wages rising, and to what extent? That might be reflective of greed.

In short: they rose significantly in 2021, but not in 2022. The executive research firm Equilar works with the Associated Press annually to study CEO salaries. The most recent report, for the calendar year 2022, showed that CEO pay raised only 0.9%, the smallest increase in salaries since 2015. The median compensation was “just” $14.8 million for a S&P 500 CEO, and was actually smaller than the raise the median everyday employee saw, at 1.3%.

But in 2021, CEO raises were gigantic. They rose by a whopping 17.1% that year alone, while the median everyday employee saw just a 4.8% raise.

Are corporations taking larger profits now than before?

Yes. And no.

There’s no real question that companies took big, big profits as inflation occurred, more than they were in the decade leading up to 2020. Indeed, the Institute For Public Policy Research report that came out this past week found that of 1,350 companies studied worldwide, nominal profits were on average 30% higher at the end of 2022 than at the end of 2019. That’s significant.

But as the Cato Institute — the libertarian think tank — reasonably points out, the trend of companies taking huge profits coming out of recessions isn’t new. Indeed, it’s happened every time since 1948.

The economic theory at play here: recessions reduce costs for companies by making goods cheaper and lowering wage costs. But on the way out of recessions, demand for companies’ products or services is back to normal, raising profits. And of course, then the companies expect higher costs ahead, so they raise prices. In the mean time, they make more money.

I’ll also point out that this spike is a little different than most of the others since 1948. In the past, we saw those spikes in profit-taking growth get more immediately zeroed out, or turned even to negative growth in profits year-over-year. This one has lingered a bit longer, with inflation from corporate profits sticking in that 1 to 3% range.

Did larger companies raise prices more?

My thinking on this question is simple: small businesses are probably more in tune with the normal day-to-day lives of their customers than larger corporations. Maybe those distant Wall Street executives were more willing to be greedy than the average store owner who knows the customers face-to-face?

This was a surprisingly hard question to answer — a lot of data points to somewhere adjacent to this question, but I didn’t find any well-respected studies that actually answered it directly. One hint came from a Digital.com survey to 1,000 retailers, who were asked if their prices had risen by more than their costs had risen. The survey found that 63% of the “large enterprises” said they had raised prices to more than offset costs, while 52% of small and medium business owners said the same.

In some ways, raising prices by more than costs have increased is natural. After all, if a business takes home the same profit in a post-inflation world that they did in a pre-inflation world, they can use that profit to buy less stuff than before.

There was more solid research on the impact of a company’s market power, though. Market power is the concept that some companies have a greater ability to change the price of an item in the marketplace than others. If Delta flies the only nonstop route out of Salt Lake City to Cincinnati, it will have a very large impact on what the cost of that service is in the overall marketplace. Ditto with, say, Exxon’s decision on oil prices, or Heinz’s decision on ketchup prices.

And what multiple researchers have consistently found is that those high-leverage companies consistently increased their prices more than their lower-power competitors during the inflationary period from 2021 to 2022. Kraft Heinz, Tyson Farms, General Mills, and PepsiCo are four examples you’ll have heard of who were found to have done this.

The free-market capitalism argument is that these companies would be punished by consumers for doing this. If Pepsi raises prices and Coca-Cola lowers theirs, more people will just buy Coke, right?

PepsiCo’s CEO, Ramon Laguarta, was asked about the company’s historically high prices in an earnings call. “Obviously with the set of inflation trends that we’ve seen in some of the commodities and so on, there’s probably going to be very little incentive for anybody to break what is a very rational environment that we see today,” Laguarta said.

In other words — Pepsi is highly confident Coca-Cola won’t lower its prices to grab more business. Instead, both companies will keep prices high and enjoy the profits.

The real debate

As you can see, there’s significant evidence of corporate profit-taking in the months after the pandemic as the economy recovered. There’s only more limited evidence in the most recent months.

Here’s where we get to what I think is the real source of the disagreement: does that profit-taking count as greed?

If Pepsi charges $2 per can now compared to $1 before, and 80% of people will still buy Pepsi, does that price hike count as greed?

On one hand, it’s just good business. It’s also a bit of preparation with regards to economic trends. And third, as the Cato Institute folks point out, it’s also a natural result of the market being flooded with pandemic stimulus money. Cato notes that consumers, despite the rising prices, are as a whole spending even beyond those price hikes: “American consumers have ‘played ball’ (with the rising prices) because they have the money to do so.”

Those 80% will be irked, but their behavior hasn’t changed. If they really wanted to, they could stop buying Pepsi.

On the other hand, what about the 20% of people who newly can’t afford Pepsi?

Pepsi executives could have chosen to keep prices moderate, making their product available to more people, and still have made their usual oodles of money, enough to pay their CEO millions and pay their employees well and push product innovation forward and so on. Instead, they chose to target a slightly smaller audience of buyers to pay much more in order to get even more oodles of profits. Personally? Yeah, I see that as greed.

And what happens when the product category isn’t cola but is instead bread? Or housing?

I see overall dissatisfaction with the economy as basically occurring on two fronts. There are people who are, like me, annoyed at the price hikes but are doing fine enough anyway.

Then there are people who are not doing fine. Those are the people who lost their jobs during the pandemic, who couldn’t use their stimulus checks on cola because rent or blankets were more pressing needs. Those are the people who have unexpected medical ailments or familial situations preventing them from taking advantage of the good employment opportunities available. Those are the people we sometimes see on the streets.

Those are the people who, frankly, this economy has left behind. And those people don’t care if our inflationary times were due to corporate greed or economic logic, nor the political debate that seeks to lay blame on one party or another. They’re not merely annoyed at inflation, they’re devastated by it.

We need to find a way to build incentives in our economic system that help those people out — so that considering their well-being is as natural for CEOs as considering rising prices or taking profits. And at the moment, I just don’t think that it is.

Andy Larsen is a data columnist for The Salt Lake Tribune. You can reach him at alarsen@sltrib.com

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