Corporate profits rise amid inflation as some Democrats cry foul

As consumers feel the pinch of inflation, corporate profits are hitting all-time highs, adding impetus to Democratic arguments that big business is gouging consumers and making inflation worse.  

Inflation has become a major headwind for Democrats ahead of this fall’s midterm elections, when the party is at risk of losing its narrow majorities in the House and Senate.  

Rising prices have contributed to President Biden’s faltering approval ratings, adding to Democratic anxieties. 

But Sen. Elizabeth Warren (D-Mass.) and other Democrats contend it is increasingly clear that part of the problem is big business and that Democrats need to go on the attack to fight inflation by pressuring corporate America to stop raising prices.  

“Giant corporations are using inflation as cover to raise their prices & boost their profits,” the senator wrote on Twitter last week. “In industry after industry, we have too little competition and companies have too much power to increase prices. I’ve been calling out this corporate profiteering & price gouging.” 

The net profit margin over the first quarter for the S&P 500 index of major U.S. companies was 12.1 percent, according to an analysis by publicly traded data company FactSet. 

Overall, corporate profits after tax, as reported by the U.S. Bureau of Economic Analysis and compiled by the Federal Reserve Bank of St. Louis, hit $2.7 trillion in the fourth quarter of last year, just off the all-time high of $2.72 trillion in the previous quarter.  

That’s a 40 percent increase in profits from the pre-pandemic level of $1.96 trillion for the fourth quarter of 2019 and nearly an 80 percent increase from the pandemic low point of $1.5 trillion. 

It’s a matter of dispute whether business is taking advantage of inflation, as Warren suggests, or if the profits simply reflect a strong economy.

“This is very much a business cycle phenomenon, not changing patterns of greed or a desire to gouge consumers,” Will McBride, an economist at the Tax Foundation, a right-leaning Washington think tank, said in an interview.

He also said tax cuts provided by the Trump administration and a GOP Congress contributed to the profits.

“In fact, what we’re seeing is even more than a business cycle. In recent years, we had a large tax cut with the Tax Cuts and Jobs Act, the largest component of which was the reduction in the corporate tax rate from 35 percent to 21 percent, and that certainly boosted after-tax profits,” he said.

McBride also said the dominance of Apple, Amazon, Netflix and other U.S. tech companies, which were poised to take advantage of the digitalization trends sped along by the pandemic, were another reason for record profits.

Inflation itself may be part of the reason for the profit windfall as well, according to Peter St. Onge, an economist with the right-leaning Heritage Foundation in Washington.

“If you’re a business and you bought some inventory a few months or years ago, and you sell that inventory today, you’re going to get a higher price for it,” St. Onge said. “That’s an accounting profit, not a true economic profit, because assuming you want to keep operating your business, you’re going to need to replace that inventory. But this does produce a short-term increase on the balance sheet.”

The energy sector saw the biggest single increase in its profit margins over the last year, more than doubling to 11.1 percent from 4.6 percent, according to FactSet. 

That jump comes amid rising gas prices that have surged further this year with Russia’s war on Ukraine and subsequent sanctions on Moscow.  

John Butters, an analyst with FactSet, wrote in a report on the figures that companies indexed in the S&P 500 are increasingly citing inflation as raising their costs.

“During the previous earnings season, 356 S&P 500 companies cited ‘inflation’ on earnings calls for the fourth quarter, which was the highest number in at least 10 years,” Butters wrote.  

“However, companies are also raising prices to offset these higher costs, as the S&P 500 is projected to report revenue growth above 10 percent for the fifth straight quarter.” 

The record number of inflation citations, paired with skyrocketing profits, has led Democratic senators like Warren to cry foul.  

“As we emerge from two years of the coronavirus pandemic, American efforts to return to normal are being stymied by inflation, driven in part by corporate profiteering and price-gouging,” she wrote in a letter to the FTC.

Her sentiments echo those of Sen. Bernie Sanders (I-Vt.), who wrote on Twitter in February: “Take a look around the economy. McDonald’s: profits up 59 percent. They’re raising prices. Starbucks: record profits. They’re raising prices. Amazon: record profits. Shock of shocks! They’re raising prices!” 

Butters, of FactSet, wrote that the profit bonanza is likely to continue, with companies in the S&P 500 expecting their profit margins to grow over the year.  

“It is interesting to note that analysts believe net profit margins for the S&P 500 will be higher than Q1 2022 for the rest of the year,” he wrote. FactSet forecasts for the S&P 500 a 12.7 percent profit margin for the second quarter of 2022, a 13.1 percent margin for the third quarter and 12.8 percent margin for the fourth quarter of this year.

While wages have been rising, they are not rising enough to keep up with either inflation or corporate profits.  

According to an analysis by the Peterson Institute for International Economics, wages and salaries were up 4.5 percent during 2021, the fastest increase since 1983. This brought wages to 1.2 percent above their pre-pandemic levels.

But when adjusted for inflation, wages actually fell 2.4 percent over the same period. The most recent numbers from the Department of Labor show that inflation-adjusted wages decreased by 2.7 percent from March 2021 to March 2022. A slight decrease in the length of the average work week resulted in a 3.6 percent decrease in inflation-adjusted wages during the last year.

“Wages in the short term are quite sticky, they don’t adjust rapidly either to positive or negative market conditions,” Kyle Pomerleau, an economist with the American Enterprise Institute, said. “More exposed to the ups and downs than wages are the corporate profits.”