Chief executives — especially of consumer-facing companies — beware.
Policymakers, economists and, increasingly, the public are growing sceptical of justifications for rising prices. Bumper profits and bigger margins have not gone unnoticed and a new word, greedflation, has started to crop up.
In the past two years, non-financial companies in the US and Europe have fared well despite stiff headwinds from the pandemic and the war in Ukraine. Even with supply chains bottlenecks, strains on global shipping and disruptions in the supply of energy and commodities, corporate profits have surged.
Companies passed these higher input costs on to their clients, and then went further: margins reached record highs. Earnings before interest and taxes peaked in the course of 2022 at nearly 18 per cent of revenues on average for the largest US listed companies and more than 15 per cent for Europe’s biggest listed groups, according to data compiled by Refinitiv.
It took some time for central bankers and policymakers, more worried at first about a potential wage and inflation spiral, to take note. But they have now identified what has also been called “excuseflation” — when companies with market power seize on publicly reported disruptions to create legitimate justifications to increase prices — as a problematic behaviour because it heightens inflationary pressures. Anecdotal evidence is mounting in the US and the EU, notably Germany.
“This position, that profit and inflation have been linked, has now become mainstream,” said Isabella Weber, assistant professor of economics at the University of Massachusetts Amherst, who showed in a paper published this year that some companies had amplified US inflation in the wake of the pandemic.
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It could be that policymakers are too late to the party already. While they remain historically high, profit margins have started to shrink in the past two quarters and companies are warning investors of tougher times ahead.
Partly this is because consumers, whose savings had grown during lockdowns making them more willing to pay higher prices, are becoming less amenable. Many are also having to budget for higher mortgage payments because of rising interest rates.
This hasn’t stopped calls for direct action targeting companies suspected of price gouging. Distrust in matter of pricing risks outlasting the trend itself.
When it emerged that prices of UK groceries had soared 17.5 per cent in March compared with the same period a year earlier, Société Générale global strategist Albert Edwards tweeted: “More Greedflation? When are government going to force a halt to this price gouging? Smacking the consumer with higher and higher interest rates to suppress profit margin inflation is too blunt a tool.”
In the US, governor of California Gavin Newsom this week signed anti-gasoline price gouging legislation while in New York, attorney-general Letitia James has outlined plans to strengthen the state’s investigative powers on consumer price increases. Record high egg prices have also drawn scrutiny from Democratic lawmakers Elizabeth Warren and Katie Porter.
Weber, who suggests closer monitoring of corporate behaviour and some targeted price controls, welcomed the legislative and policymaking reaction but said it was rather late. “Generally speaking, policy response is lagging. A year has passed since we saw profits explode.”
A consequence of these high margins, she noted, will probably be more fractious labour relations, as workers start demanding a bigger share of the pie. “Companies need to redistribute these profits,” she said.
Source: Economy - ft.com
