For months, progressives have sought to frame inflation as being the result of corporate greed. Politicians like Sen. Elizabeth Warren (D-MA), backed up by news “analyses” echoing the same point, argued that high corporate profits were the smoking gun that proved that businesses were using “inflation” as a cover for driving up prices simply because they wanted more money. This vague finger-pointing even took shape in the form of a messaging bill aimed at oil “price-gouging” that would have done nothing to bring down high gas prices.
Well, there’s good news for these inflation crusaders: corporate profits decreased substantially in the first quarter of this year! Surely that means that, their nefarious game called out, corporations shook their fists and returned prices to levels deemed more appropriate by Sen. Warren et al.
Or not. Inflation actually increased at a faster rate in the beginning of this year than in the last quarter of 2021, when corporate profits were still increasing.
The idea that corporate greed was at fault for inflation was always a ridiculous one, as even prominent administration officials like Treasury Secretary Janet Yellen have said. After all, if prices were solely up to the whims of big businesses, why would there ever not be inflation?
It’s not groundbreaking to say that the goal of a corporation is to make money. It’s why for-profit corporations exist — it’s even in the name. But that’s always been the case, not just in the last year or so when consumers have been hit with inflation. If inflation is something that enriches corporations and is at their control, why would they ever turn it off?
While businesses “set” prices in the sense that they tell consumers what to pay if they want the product, consumers have just as much of a role. If you started a pencil business tomorrow, it likely wouldn’t make a difference if you set the price per pencil at a thousand dollars or a million — you probably wouldn’t sell any pencils either way (unless they were truly astounding pencils).
That might sound obvious, and it’s of course an oversimplification (some products are more demand elastic than others), but the point is that it’s not goodwill or the fear of progressive tongue-lashings that keeps businesses from imposing endless price hikes — it’s the desire to attract customers, a key component of which is competitive prices.
So what was the reason for those rising corporate profits before, when inflation was still happening? Well, one significant one was the quirks of corporate accounting, a wonkiness that makes outrage farming easy using statistics that don’t show the full picture.
Take a hypothetical business that sells widgets. This business bought a thousand widgets from a widget producer in 2020 to sell in 2021. In 2021, prices go up, and the business realizes it won’t be able to sell as many widgets in 2022, so it only buys 800 for the coming year.
To an outsider looking at this widget company’s financials, the company made a great profit in 2021. Not only did it make more money per sale, but its input costs actually went down since it only had to buy 800 widgets instead of a thousand. Even if this widget company didn’t manage to make as many sales in 2021 as it did the previous year, from a cash flow perspective its financials look rosy.
But that form of accounting doesn’t really account for the business’s financial outlook. It has essentially had to shrink its business in response to rising prices, and the profit comes from not yet having realized the negative impact of higher prices the ensuing year. Yet the business would have been better off in the long run had prices remained steady and it had been able to continue selling greater numbers of widgets.
Taxpayers should not be taken in by these naked attempts to deflect blame for inflation from policymakers by scapegoating “corporate greed” and “greedflation.” Corporate greed isn’t unusual, but eight percent inflation is.
