Corporate profits hit record high in third quarter amid 40-year-high inflation

Corporate profits in the nonfinancial sector hit a record high of $2.08 trillion in the third quarter even as 40-year-high inflation continues to squeeze American consumers.

Profits adjusted for inventories and capital consumption rose $6.1 billion from the second to third fiscal quarters, the Commerce Department reported Wednesday, continuing a red-hot recovery from the flash recession caused by pandemic shutdowns.

Following a two-quarter dip in 2020, quarterly profits have surged by more than 80 percent over the last two years, from around $1.2 trillion to more than $2 trillion, adding weight to arguments that the private sector is driving inflation by exploiting consumer expectations to keep prices elevated.

The “Fed should make clear that rising profit margins are spurring inflation,” Paul Donovan, UBS chief economist of global wealth management, wrote in the Financial Times in November, asking Fed Chairman Jerome Powell to elucidate this point as he shepherds the U.S. central bank to raise interest rates and slow economic activity.

“Companies have passed higher costs on to customers. But they have also taken advantage of circumstances to expand profit margins. The broadening of inflation beyond commodity prices is more profit margin expansion than wage cost pressures,” he wrote, adding that “resilience in demand has given companies the confidence to raise prices faster than costs.”

Companies in a wide variety of business sectors openly express this confidence on earnings calls with investors, 

“I’m optimistic that with time, the market — and we’ve proven this, I think, over the years that the markets will come back into balance, but it is a function of time. I think in the short term, everyone will squeeze what they can,” Exxon Mobil CEO Darren Woods said during his company’s third quarter earnings call, as transcribed by financial media company The Motley Fool.

Pepsi Co. financial chief Hugh Johnston said on his own company’s third quarter earnings call that his company “is capable of taking whatever pricing we need.”

Corporate profits are getting scrutiny from Congress.

At a September hearing of the Economic and Consumer Policy Subcommittee of the House Oversight and Reform Committee, subcommittee Chairman Raja Krishnamoorthi (D-Ill.) said that the dynamics of supply and demand are simply not enough to explain why corporate profits are so high.

“Since early 2021, Americans have been suffering from rising prices caused by global supply chain disruptions and changing demand patterns due to the pandemic. Even combined with traditional supply and demand factors, however, these elements are insufficient to totally explain why inflation remains elevated,” he said.

“There are other factors that contribute to inflation that have not received enough attention. One of those factors is extreme price hikes — in other words, companies raising prices far more than required to offset higher costs even when accounting for shifts in supply and demand, resulting in the highest profit margins we have ever seen in the last 70 years,” he added.

Economic advocacy organizations have been sounding the alarm about the effect of sky-high profit margins on American consumers.

“Today’s record corporate profits mirror what we have been hearing on earnings call after earnings call: Corporations are gleefully reporting that their strategy to burden families with unnecessary price hikes is working,” Rakeen Mabud, economist with the Groundwork Collaborative, said in a Wednesday statement.

“Powerful corporations in concentrated industries will keep prices sky high until lawmakers rein them in,” she added.

Some economists have stressed that while rising corporate profit margins are happening along with inflation, they’re more of a byproduct as well as an ancillary cause than the primary driver.

“I am personally pretty skeptical about the ‘greedflation’ narrative,” Harvard economics Ph.D. student Gabriel Unger, co-author of an influential paper about increasing private-sector markups over the past 40 years, wrote in an email to The Hill in July.

“It’s true that markups (and market concentration) have been rising sharply since around 1980. But over almost this whole period, up until the pandemic, inflation has been historically very low,” he wrote. “So for most of the past 40 years, we’ve had an economy with high and rising markups, and very low inflation. It’s possible that in the absence of the former, inflation might have been slightly lower, but I still think this suggests it’s unlikely that high markups on their own cause an explosion of inflation.”

—Updated at 5:11 p.m.