How Corporations Are Taking Advantage of Inflation

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S1: Hey, everyone. Just wanted to give a special welcome to all of our new listeners from over at Spotify. Yeah, we see you guys. Welcome. And just make sure you go and click that follow button. It’ll make sure I am sitting in your feed day in, day out. You won’t miss a thing. All right. On with the show. For the last few months, Lindsay Owen and her colleagues at the Groundwork Collaborative think tank have been listening in on these phone calls.

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S2: We combed through and listened in on hundreds of corporate earnings calls. These are the quarterly phone calls that CEOs and CFOs have with their investors and shareholders each quarter after they release their quarterly report.

S1: It’s like a it’s like a corporate pep rally, right?

S2: It can be a bit of a pep rally. Yeah. Boosting up the investors, trying to juice the share price a little bit.

S1: Lindsay’s been looking for answers about our weird economy at the moment. Specifically, she’s looking for the origin of the inflation that’s dogging all of us at the grocery store, at the gas pump, just about everywhere. Are these corporations feeling pressed right now? Like, are they like, oh, this economy, man, it’s stretching us.

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S2: The main takeaway that we had from these earnings calls is these CEOs are saying that inflation has been very good for business. I’d like to welcome everyone.

S1: To the Coca-Cola Company’s first.

S2: Quarter earnings results conference call.

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S1: Today’s call is being recorded. Well, these companies don’t use those words exactly. But if you listen, it’s pretty clear that the weirdness of this economy hits a bit different if you’re a multibillion dollar corporation.

S3: Let me first start by saying how pleased we are with the results in the first quarter.

S1: It’s also clear these CEOs, they aren’t exactly restraining themselves when it comes to pricing.

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S3: I’ve talked about our approach to pricing several times, and that is going to lead to more time. They’re going to be more price increases depending on where you are. I mean, there are countries with inflation well into double digits.

S1: On this call from just last month. Coke CEO kept getting pressed about his approach to pricing and the way costs were getting passed on to consumers. Eventually, he said, Listen, if we’ve got a choice, we’re going to air toward taking the price increase rather than not taking the price increase.

S3: And so that’s kind of modus operandi.

S1: And he is not the only one.

S2: The Hostess, CEO of the snack food company says, look, when all when all prices are going up, it helps it helps us take more. People don’t really know kind of which piece of this is justified and which piece of this is price gouging.

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S1: It sounds a little bit like capitalism’s going to capitalism.

S2: You know, I think that’s true. And in some sense, you know, what I’m saying is not really unexpected. What you hear is CEOs really hiding behind inflation, using inflation as cover for the price hikes they’re taking. And the question I think we have to be asking is, look, during these moments of national crisis, during these moments of transition for our economy, you know, how much is enough? And do we think that companies should be able to exploit these crises to run up the score?

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S1: Today on the show. Are corporations to blame for higher prices? You just can’t avoid a mary Harris you’re listening to. What next? Stick around. When she was listening in on these shareholder calls for companies like Hormel and Tyson, Chevron and Exxon. Lindsay Owens says she noticed something. Executives kept coming back to the same four points sometimes. Like that Coca-Cola executive you heard at the top, they talked about being unsure of when this inflationary moment was going to end and not wanting to miss a chance to jack up prices. Other execs alluded to that. Everybody else is doing it argument.

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S2: Look, when everyone’s doing it, it helps. And you hear this from market analysts, too. We have this great quote from a guy who is the head of research at Barclays Bank who says, look, this inflationary moment is giving companies a lot of air cover, his words, air cover, you know, to raise prices.

S1: So they’re egging each other on.

S2: Absolutely. The third thing you hear is folks blaming shareholders, saying, look, like our shareholders expect us to recoup in this moment to drive as much pricing as we can in this moment. They want the cash. In some cases. They want us to throttle production. They don’t want us to ramp up production. They want us to take pricing in this moment. You know, and the final thing you hear is folks letting you know that they’re not planning to give the pricing back. So despite the fact that in some cases, you know, particular materials prices have cooled, you know, they’re saying, look, the new price has now been accepted by the consumers. So we’re not planning to to lower the prices even if materials costs go down for us.

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S1: Is it useful to distinguish between real inflation, like when the cost of a good goes up and therefore the cost of the product that uses that good goes up versus fake inflation like inflation that’s just adding extra money on top of what you usually charge.

S2: Yeah, I think, you know, I think it’s that sort of more technical way to say that would be, you know, distinguishing between the input costs that, you know, the costs that are going up and the markup, which is the sort of discretionary portion that, you know, that firms are deciding to take. And that’s the additional pricing they’re taking on top of the rising costs.

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S1: Do we have a measurement of like what the cream on top is versus like the actual cost at the bottom?

S2: Yeah. The Economic Policy Institute study that I mentioned puts it at about 54% of the price increases are coming from the markup. So, you know, that’s more than half and that’s the majority.

S1: Econ 101 preaches that prices are set by the intersection of supply and demand and that companies are going to compete with each other. And so, therefore, prices will remain lower. So what broke here?

S2: So I think the Econ one and one explanation has always been a little bit oversimplistic and lacking in nuance. You know, the truth is this economy that we live in, in many ways is created by power structures. Right. You know, companies with a lot of pricing power companies with a lot of market power have the ability to take excess pricing in this moment. And I think what these graphs that you looked at when you were and, you know, in college really messed was there was the component of the economy, you know, was it was power. It was market power.

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S1: Market power has been a major theme for politicians looking to pin the blame for inflation on corporations. Back in the fall, the White House called out meat companies for jacking up their prices. National Economic Council director Brian Deese held a press conference highlighting how industry consolidation was part of the problem.

S4: White House officials took aim at the big meat companies. They say for companies JBS Tyson Foods, Cargill Meat Solutions Corp and National Beef Packing Company Control. Most of the market and data shows they’ve been raising prices during the pandemic while generating big profits.

S3: It raises a concern about pandemic profiteering, about companies that are driving price increases in a way that hurts consumers.

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S2: That has and he said, look, like Americans are getting hit at the grocery store or at the checkout line and meat prices in particular are up. And this has to do with the fact that these four companies have us over a barrel and they’re squeezing ranchers and they’re passing along high prices to consumers.

S1: A few months later, when Fed Chairman Jerome Powell showed up in front of Congress, Senator Elizabeth Warren grilled him on whether he thought monopolies were driving inflation. Chair Powell in markets.

S5: With lots of competitors, are companies profit margins generally likely to stay low?

S2: And she is really asking him, look, isn’t the fact that our markets have become so concentrated over the last few decades, making it easier for companies to really go big on pricing in this moment without any risk of being undercut by the competition. And Jerome, how sort of, you know, shoes away her point about concentration. But what he says next is really revealing.

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S3: That that could be right. It could also just be, though, the demand is incredibly strong. And and that. You know, they’re they’re raising prices because they can. Well, that’s the point.

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S1: They’re raising prices because they can.

S5: And they’re not being competed.

S2: Down. You know, and so she immediately says, you know, repeats it. And right. For the record, yes. Sometimes corporations are raising prices just because they can. And that’s the problem here. Right. So what he hinted at is this pricing power. And I think, you know, you get pricing power from market share sometimes, but sometimes you get pricing power because you’re selling you know, you’re selling necessities and people really can’t do without. Right. You need a box of diapers. You’re going to buy a box of diapers.

S1: It’s interesting to me to hear you talk about those two moments, because when I hear you talk about them, it sounds to me like initially the thinking potentially in Democratic circles was like, let’s talk about monopoly power. And then Jerome Powell was kind of like, yeah, but maybe corporations are just being corporations. And people may have expanded their thinking after that and thought, hum, maybe, maybe we should go. We can go bigger here, which is kind of interesting.

S2: Yeah. So, you know, this is a story of pricing power. This is a story of monopoly power. But, you know, not to get too technical here, but this is really a story of, you know, 50 years of building an economy that works great for large corporations and for Wall Street and doesn’t work so well for us. I mean, we’ve got waves of mergers and acquisitions leading to a highly concentrated economy. We’ve got deregulation, we’ve got offshoring, you know, so much so that we get to the eve of the pandemic. And, you know, we built this very fragile supply chain without a lot of resilience. So I think the sort of long arc story is really important here. And then, you know, this pandemic moment with the supply chain snarls with China’s COVID policies, now, with the war in the Ukraine really is just a perfect storm. You know, there isn’t a sort of simple one line reason why we’re in this moment. It’s a constellation of reasons, you know, during the sort of before times, during the normal times, if you will, companies would frequently, you know, try to keep prices low to drive market share, to bring in more customers. It’s hard to do that when there are product shortages. It’s hard to do that when you can’t guarantee supply. And so I think what you’re seeing here in this moment is a flip kind of away from driving profit via picking up additional market share and instead a move to drive profit by passing along higher prices. And so, you know, this may be a short run or medium run phenomenon, right? We may see you know, we may see a reversion to the mean, although we have heard in the earnings calls, folks are saying this is interesting. We may keep our supply low going forward. We really like the pricing power we have. You know, we saw that with the pink company. We’ve seen that with some of the auto manufacturers who I think, you know, are not planning to deliver that sort of excess supply where there, you know, 100 cars on the lot at all times going forward. They kind of like this new normal. But, you know, so that’s not just a story of concentration, you know, it’s also a story of adaptation. Right, of finding new ways to profit in this moment.

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S1: When we come back, if the problem with inflation is corporations, is there a new kind of fix to be had? If the source of inflation, at least in part, is this active choice on behalf of companies to raise prices on consumers, I’m wondering what other measures need to be put into place to protect people and maybe control inflation from here?

S2: Yeah. So the Federal Reserve is moving on interest rate hikes. And, you know, Federal Reserve Chairman Jerome Powell has been quite clear about the limitations of his tool, his interest rate tool. You know, he said and hearings, you know, in front of Congress and he’s said in press conferences, yeah, like I don’t do the supply chain. I don’t do the war in the Ukraine. I don’t do concentration. These are not things that my tool matters for. So he’s got his interest rate tool. I think President Biden has another tool, which is the power of, you know, the regulatory and administrative state. And in that sense, you know, he has directed the Federal Trade Commission, the Department of Agriculture, the Federal Maritime Commission, which regulates the big ocean shipping companies. He has tasked them with sort of investigating and using their enforcement authority to crack down on excessive pricing, you know, when it rises to the level of collusion or price fixing. But it is a limited tool as well. Right. And, you know, I think Congress needs to move here. And I think there are a couple of things Congress can do to combat the price gouging and profiteering we’re seeing. And I think there’s actually, believe it or not, a ton of momentum.

S1: Is that momentum bipartisan?

S2: So there is a little bipartisan momentum. We’re seeing some legislative packages in the Agriculture Committee, in the Senate that are bipartisan, with Senator Chuck Grassley from Iowa on board to go after the meat packing monopolies that are, you know, squeezing ranchers and, you know, overcharging consumers. And we actually saw a little bit of bipartisan action out of the Judiciary Committee on on a really interesting form of price gouging that we’re seeing from from Visa and the credit card companies. You know, Visa charges basically a flat percentage fee on each transaction rate. So if the ticket price goes up, if prices are going up, visa is already netting more money. And you hear that on the earnings calls. Visa’s CEO says, yeah, look, inflation is typically pretty good for visa as model, right? But what Visa, MasterCard and the other credit card companies are doing is they’re not just sort of like sitting back and enjoying the fact that inflation is boosting their profits outright. They’re actually raising those interchange fees. And so Senator Dick Durbin has joined Republicans in the Senate to sort of push back on on that component as well. So there is a little bit of bipartisan momentum here, but largely, this is absolutely being led by Democrats in Congress.

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S1: Well, it’s interesting. You’re talking about these potential solutions, and they seem very focused on particular industries like the credit card industry or like the meat industry. But I know that you’ve talked about broader ideas like a federal price gouging statute or discouraging profiteering through the tax code. Those are kind of interesting. Can you lay out how that would work?

S2: Yeah. So using the tax code to take on price gougers I think is a really interesting idea. Basically what you would impose is a sort of price gougers tax. And what this would do is it would say, look, you know, on your sort of normal profits, like the profits that you made in the before times, you know, you pay the regular tax rate on the profits that you’re getting from exploiting foreign war or exploiting the supply shortage. You’d pay a higher tax rate on. And we’ve had taxes like this in the past. We had one as recently as 1980 in oil and gas. And we had broad based ones, you know, throughout the middle of the 20th century.

S1: It seems to me that it would be hard to prove price gouging potentially. Like, how do you even go about that?

S2: Yeah, I think there are a number of ways to do it. But mostly I think what you say is, you know, you look at, you know, two or three or five year period before the pandemic and you sort of gauge the the sort of normal run of the mill level of profits that these companies have. And then you look at the period during this pandemic and you see what the changes, and that’s sort of what you would attribute to the kind of, quote unquote, excess profits.

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S1: I guess that also sort of puts a line in the sand and says, hey, like, we’re going to pursue this now. Make your choices accordingly.

S2: Yeah, look, price gouging gets a lot less fun. You know, you don’t really want to take as much pricing as you can if the benefit of that is going to go to the Treasury in a nod to it, not to you and your shareholders. Right. So, you know, it disincentivizes it makes it sort of less lucrative to be a profiteer or a price gouging or, you know, we don’t have a federal price gouging statute on the books. We have a patchwork of state price gouging statutes that work in a variety of different circumstances. They’re sort of triggered by different events. So some of them are triggered by public health. Crises. Some of them are triggered by natural disasters. Right. You can’t sell bottled water for $100 after a hurricane. Doesn’t matter if that’s good for profits or if that’s what your shareholders ask you to do. In a number of states, we’ve decided that that’s not in the public interest. I think it’s time to do that at the federal level. Elizabeth Warren has announced that she will be releasing a federal price gouging statute that’s been reported out in the press. And, you know, my hope is that that would be able to move soon.

S1: I wonder how likely you think it is that Congress will actually act here? And I ask that particularly because it seems like not having a federal price gouging statute is a choice that the government has made. And I’m not sure why they would stop making that choice unless they felt a lot of pressure from everyday consumers.

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S2: I mean, I think Congress does feel a lot of pressure right now from consumers. You know, constituent calls are off the hook about inflation. I mean, that was true even at the end of 2020 when, you know, constituents were calling members of Congress and saying, look, like Thanksgiving, turkeys are through the roof. The cost of Christmas presents for my kids are up. What are you going to do about it? So they’ve been hearing about this for over a year now.

S1: But inflation is also a potent weapon for Republicans staring down the midterms and saying blame Joe Biden for this. They’re literally putting stickers on gas pumps saying, I did it, you know, pointing at the price.

S2: Yeah. Yeah. I mean, you know, I think it’s a matter of whether or not you’d need 60 votes or, you know, or 51 votes for some of this legislation. But, you know, from what I can tell, Senator Schumer has announced that he is planning, you know, to potentially put a vote on the floor for a price gouging statute narrowly applied to oil and gas that Senator Maria Cantwell is working on. I guess we’ll find out soon enough. But, you know, we may see a vote on a piece of legislation like this in the near future.

S1: There was one more thing I wanted to talk to Lindsay about before we got off the line, her detractors, because not everyone agrees that corporations are doing anything wrong here. In fact, a few weeks back, the Wall Street Journal ran a story that pin the blame on someone else entirely. Its headline Workers are changing jobs, raking in big raises and keeping inflation high. I wonder a little bit talking to you like, why not both? Couldn’t it just be both things altogether? Workers leaving their jobs, demanding raises combined with corporations pursuing aggressive pricing that are causing inflation. Do you see it that way, too? Or do you think I’m looking at it wrong?

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S2: Yeah. I think, you know, it’s pretty clear that, you know, labor costs are not driving the inflation that we’re seeing right now. There are a couple of reasons for that. The first is, back in the 1970s, when we had a major bout of inflation, there was a lot more labor power in the United States and there were a lot more unionized workers in the United States. And those unionized workers had what we call sort of index contracts, right? So they had, you know, in their collective bargaining agreements, their wages were indexed to inflation. And so they had a mechanical way for their wages to sort of keep up with inflation. You know, we don’t have that kind of labor power in the United States today. We don’t have and it’s only 6% of private sector workers are unionized. So there isn’t a lot of ability for workers to kind of catch prices in this moment. So I think it’s important to remember that the stories that we heard about wage price spirals and and workers wages driving inflation just don’t really hold in today’s economy, unfortunately, where pricing power really is eating labor power’s lunch. The second thing I’ll say is, you know, the data is pretty clear on this. So that study I mentioned where we showed, you know, 54% of the of the price increases are coming from the markup. That seems studies shows that only about 8% of the price increases that we’re seeing are coming from labor costs. And that’s actually down. We usually have labor costs accounting for a larger percentage of price increases. So labor costs are really not the story here, and I think that’s important to note.

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S1: And the main pushback to what you’re saying, my understanding is that your point of view means that, like to hammer every problem looks like a nail. You know what I mean? Yeah, that like, your focus is on corporate power, and so obviously you’re going to be like, it’s corporate power, but I don’t know that anyone actually quibbles with your statistics or what you have to say.

S2: I’ve heard every kind of, you know, piece of pushback in the book early in the pandemic. What we heard is, oh, you guys just don’t understand. These companies are profitable because demand is up and they’re selling more stuff. And, you know, what we explain very clearly is, look, we’re looking at profit margin data, not profit data. And the rising costs of labor and raw materials should be eating into margins. And instead, margins are expanding. And so what that says to us is they’re passing along inflation, but they’re not just passing along inflation. They’re going through more. And that more is what’s driving the profit margins in addition to the profits. The other thing we hear a lot is this is so silly. Something has to change for prices to increase and there’s no way corporations got more greedy in the last two years. But we’re not focused on the motive here. We know corporations have always been out to make a buck. So this sort of corporate greed piece is a constant, right? We’re always going to see that. What we’re seeing here is not just motive, the opportunity. It’s the opportunity of foreign war, the opportunity of the pandemic, the opportunity of the supply chain shortages. And when the motive and opportunity collide, when you have both, that’s the moment when you can go really big on on these price increases. So, you know, I don’t believe corporations got more greedy over the last two years. What I do believe is that they found a new way to grow profit. And I think the reason that they’re so excited on these earnings calls is because they’re pretty glad they found it and it’s working pretty well for them.

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S1: You sound a little like you respect your enemy during. I mean, like you’re like you’re just making the logical choice. Well.

S2: I mean, yeah, corporate America. America’s a worthy adversary, right? I mean, it’s a big adversary. But, you know, I don’t know that I would say I respect it. I do think what we’re seeing is, is folks exploiting a time of national crisis. I mean, we are in an economic transition and economic shock here with price increases. And, you know, I think that policymakers have to do something. You know, in some ways, this is a dress rehearsal with climate change bearing down on us. We’re going to have more moments in which trade routes are disrupted, manufacturing plants are flooded, crops are burnt and flooded by natural disasters. And I think the question we should be asking ourselves is not whether we think companies are going to exploit those moments to run up the score for their shareholders. I think we know the answer. They will. But what we’re going to do about it.

S1: Lindsay Owens, I’m really grateful for your time. Thanks for coming on the show.

S2: Thanks for having me.

S1: Lindsay Owens is the executive director of the Groundwork Collaborative. And that’s our show. What next is produced by Mary Wilson Carmel Delshad and Alena Schwartz. We are getting a ton of support these days from Sam Kim and Anna Rubanova. We are led by Joanne Levine and our brand new vice president of Audio, Alicia montgomery. And I’m Mary Harris. Go track me down on Twitter. It’s where I keep the pictures of my dog. I’m at Mary’s desk. Thanks for listening. I’ll talk to you tomorrow.