International Forecaster Weekly

CORPORATE PROFITEERING MOVING INFLATION UP - Should Congress Step In?

Last fall, aerial drone photos showed dozens of huge, multi-colored container ships backed up outside the Port of LA.

Even then, it looked like inflation was going to be with us for longer than the Fed and many others were predicting at the time.

It’s simply transitory – temporary – they insisted. Turns out, they were wrong, by a long shot. 

Inflation, as measured by the Fed’s preferred, if somewhat mythical, metric – the Core Personal Consumption Expenditures Index (i.e., excluding food and energy) – has steadily risen since the pandemic was declared in March 2020.

The core PCE consistently hovered at or below the Fed’s 2% target from late 2008 until the 1st quarter of 2021.

In February 2020, just before the pandemic was declared in the U.S., the core PCE was roughly 1.8%. 

Since then, it’s risen every quarter, from its low of 1.0% in Q2 2020 to 5.2% at the end of March 2022 – more than double the Fed’s target.

Of course, the broader core Consumer Price Index (CPI-U) rose an even higher 6.5% in March (8.4% when you include food and energy prices).

Guest Writer | May 6, 2022

By Dave Allen for Discount Gold & Silver

Last fall, aerial drone photos showed dozens of huge, multi-colored container ships backed up outside the Port of LA.

Even then, it looked like inflation was going to be with us for longer than the Fed and many others were predicting at the time.

It’s simply transitory – temporary – they insisted. Turns out, they were wrong, by a long shot. 

Inflation, as measured by the Fed’s preferred, if somewhat mythical, metric – the Core Personal Consumption Expenditures Index (i.e., excluding food and energy) – has steadily risen since the pandemic was declared in March 2020.

The core PCE consistently hovered at or below the Fed’s 2% target from late 2008 until the 1st quarter of 2021.

In February 2020, just before the pandemic was declared in the U.S., the core PCE was roughly 1.8%. 

Since then, it’s risen every quarter, from its low of 1.0% in Q2 2020 to 5.2% at the end of March 2022 – more than double the Fed’s target.

Of course, the broader core Consumer Price Index (CPI-U) rose an even higher 6.5% in March (8.4% when you include food and energy prices).

How Are Corporate Profits Contributing to Inflation?

Lindsay Owens writes in a NYTimes guest essay that while official statistics on inflation such as the PCE and CPI can tell us that prices are rising, company earnings calls “provide…data that speak to why and how.”

She notes that executives from the largest publicly traded companies in the U.S. had a lot to say about supply chains, product shortages and rising prices – “mostly that they were very good for business.” 

            What Owens says is striking about the earnings calls isn’t supply chain snafus or corporate profit motives, it’s “the plain old corporate profiteering.”

In other words, the classroom adage that “’inflation is just too much money chasing too few goods’ doesn’t come close to the full story.” 

Thus, she asks, “When [are] companies (sic) exploiting consumers in a time of national crisis, [and] when should government step in?”

She argues that companies who historically keep prices low to earn profits by gaining additional market share are instead using the cover of inflation –and the Russia/Ukraine war – to raise prices and increase profits. 

As Hostess’s CEO Andy Callahan said, “When all prices go up, it helps.” The head of research for too big to fail Barclay’s echoed that sentiment: 

“The longer inflation lasts and the more widespread it is, the more air cover it gives companies to raise prices,” according to Larry Kantor.

In fact, Owens reports that more than half of retailers admitted as much when surveyed. She adds that what these quarterly earnings calls reveal is reflected in that data. 

Despite the rising costs of labor, energy and materials, corporate profit margins reached record highs in 2021. 

Greedy Energy Sector Leads the Way

Nowhere is this becoming more evident as time moves on than an opportunistic, even greedy, energy sector.

While tens of millions of working Americans have been hurt by surging gas prices, 25 of the world's largest gas and oil companies collectively pulled in $205 billion in profits last year.

And Big Oil is exploiting Putin’s invasion to even more at the pump in 2022 and further advance its financial interests.

According to government watchdog Accountable.US, top oil and gas companies took "full advantage" of sky-high prices and record profits by rewarding shareholders with more than $35 billion in stock buybacks and dividend increases.

In fact, Big Oil has been bragging to investors about its windfall profits on recent earnings calls. 

As consumer demand rose last year a brief pandemic-driven decline in 2020,  shareholders pressured oil corporations to restrict supply to drive prices higher.

Chevron, for example, called 2021 one of its "most successful years ever." Shell CEO Ben Van Beurden described it as a "momentous year." 

Meanwhile, Coterra CEO Tom Jordan characterized high gas prices as "good." And Equinor CEO Anders Opedal euphorically noted how the industry has been "capturing value from high prices."

ExxonMobil made a $23 billion profit in 2021, its largest in seven years. And it's expected to make 43% more this year – $33 billion. 

BP, meanwhile, earned $12.8 billion in 2021 and is forecast to earn $15.6 billion in 2022 – and increase of 22%.

Last year's record profits came as average gas prices in the U.S. hit $3.40 a gallon in December 2021, up 62% from $2.10 a year before. 

According to AAA, it’s now $4.28 nationwide (an average of $5.78 in California), another increase of 26% since December.

What Can/Should Policymakers Do?

According to the Economic Policy Institute, bigger profit margins – not rising labor and material costs – have driven more than half of price increases by nonfinancial businesses since the pandemic started.

And Owens says that despite clear evidence that a majority of price increases are not justified by rising costs, “there’s a fierce debate in Washington about what, if anything, policymakers should do to address it.” 

The debate primarily stems not from questions about the causes of price increases but from differing views on what policymakers should do to promote fair and just prices.

Economics 101 says that markets are efficient allocators of scarcity and that governments should have little, if any, role in guarding against unfair pricing. 

Those who support this school of thought argue that price hikes will help cool demand and alleviate scarcity by efficiently rationing goods by consumers’ ability to pay for them. 

As Owens writes, if a company hikes prices too far, their “customers will just go to a competitor across the street.” 

If they see any role for government, it’s in suppressing demand through interest rate hikes by the Fed. But that tool carries a strong risk of throwing the economy into recession.

The other side of the debate features a view of businesses exploiting supply chain dysfunctions, war and a brutal pandemic to bring in record profits on the backs of consumers. 

They believe that congressional lawmakers should step in to stop profiteering that has gone too far.

Although some economists and politicians may be reticent to admit it, prices are now subject to political considerations. 

In fact, 38 states plus DC already limit price increases on certain goods and services through laws designed to prevent companies from abusing crises like pandemics and hurricanes – events that lend themselves to scarcity and price gouging. 

In other words, over three-quarters of state legislatures have decided that although stakeholders might like to see bottled water sell for $100 a gallon and gas for $5 or more after a hurricane, that’s not fair, right or in the public interest.

But some are asking, Should lawmakers do even more? 

That is, should Congress pursue a federal law that gives the Consumer Financial Protection Bureau or some other regulator the authority to prevent companies from abusing a crisis by squeezing more profits out of vulnerable consumers?

Or should they discourage excess profiteering through the tax code – say, by increasing the corporate tax rate or imposing windfall-profits taxes like those implemented during World War II and as recently as 1980 for oil and gas?

Regulators, even without new legislation, could start by enforcing laws that are already on the books – including ones against price fixing, price gouging and collusion.

Why should corporate profit margins (as a percentage) be a lot higher during a national crisis than they normally are, aside from having introduced a new product or major innovation?

As Owens suggests, the important question isn’t “whether companies will exploit those disruptions” – because they inevitably will – “but what we can do to stop it.”

Two things are clear: (1) something ought to be done; (2) it won’t be anytime soon.

Gold and silver appear to have recovered from their lows earlier in the week and are climbing back to $1,900 and $23.00 as the weekend approaches.

Heading into mid-Friday afternoon trading, gold is up $25 from Monday’s low at $1,888. Silver is up 30¢ at $22.45.

Don’t wait for gold and silver to surge to the next level; consider adding more to your portfolio now to lock into today’s prices.