‘Tis the season for holiday sticker shock!
As Americans finish the last bits of their holiday shopping, they are feeling the heat of higher prices. Thankfully, inflation has certainly cooled down since last year: the Consumer Price Index rose 3.1% over the year ending in November 2023, compared to a 7.1% rise over the year before. But unfortunately, while prices for groceries, gas, rent, and other essentials aren’t rising as fast as they were this time last year, they also aren’t falling and remain far higher than they were before the pandemic.
This is a problem for most Americans. Although wage growth finally started to outpace inflation this summer, the typical American household now spends over $700 more per month than they did two years ago for the same goods and services. That hurts any time of year, but particularly during the holidays when many families traditionally spend more on everything from groceries to retail.
If you remember, when prices were spiraling during the holidays last year, we pointed the finger at corporations and their price-gouging tactics. By and large, they haven’t stopped in the year that followed. In fact, their behavior is perhaps even more alarming given that inflation has cooled considerably in recent months. For this week’s Closer Look, we’d like to zero in on a few examples, as well as highlight how the mainstream media and economic thought leaders have started to take the idea of corporate price gouging more seriously.
When the inflation crisis began to pick up speed in mid-2021, most mainstream economists attributed the dizzying increase in consumer prices to “overheating” in the economy. Specifically, they blamed President Biden and the Democrats’ $1.9 trillion American Rescue Plan for overstimulating the economy; with more money on hand, consumers demanded more goods and services and supply couldn’t keep up, which caused prices to climb. They also pointed the finger at workers demanding higher wages to afford higher prices on goods and services, which, as they say, further hiked prices and caused a wage-price spiral.
To put it mildly, we didn’t accept this. It’s true that demand increased as the economy rebounded from the COVID pandemic, but that spending was driven predominantly by high-income earners who were flush with cash as their stock portfolios and home values jumped – not by low-income families who got a little more financial wiggle room with, say, the expanded Child Tax Credit. Furthermore, for most of the inflation crisis, wage growth lagged behind inflation, so it’s implausible to think it was being driven by any sort of wage-price spiral similar to inflation we’ve seen in the past.
Here’s what was really going on: for much of 2021 and 2022, supply chains faced bottlenecks because of the pandemic and Russia’s invasion of Ukraine, and therefore could not keep up with high-income earners’ increased levels of demand. Corporations faced heightened production costs on account of these supply chain snarls.
If corporations faced meaningful competition in today’s economy, they would absorb higher production costs and do everything that they could to keep prices low and attract customers. But, as we argued a few weeks ago, corporations categorically do not face meaningful competition, as most industries are dominated by just a handful of extraordinarily large companies. In the end, mega-corporations used the dual excuses of supply chain snarls and the war in Ukraine to raise prices on their products, even above what would be necessary to make up for higher production costs. They gambled that customers would accept higher prices given everything that was going on in the world.
Corporate executives weren’t shy about their profiteering strategy to pad their companies’ bottom lines. Dr. Lindsay Owens and her team at the Groundwork Collaborative listened in on earnings calls and found that executives were openly bragging about their pricing strategies. Jeffrey Meli, the head of research for Barclays bank, pretty blatantly told Bloomberg, “The longer inflation lasts and the more widespread it is, the more air cover it gives companies to raise prices.”
In the end, the price-gouging efforts of corporations worked – customers “bought” the excuses that corporations fed them and continued buying their products. A study from the Economic Policy Institute found that over half – 53.9%, to be exact – of the increase in consumer prices could be attributed to fatter corporate profits alone. And those profits sure were fat, as they skyrocketed to their highest levels since 1950.
Fast forward to 2023 and our current holiday season. The world certainly looks very different than it did at the height of the inflation crisis in 2021 and 2022. Inflation has finally cooled down to manageable levels. Supply chains have unsnarled. Market shocks from the war in Ukraine have ended. Production costs for many companies have dropped. But one thing, unfortunately, is still the same – corporations are still charging outrageous prices for their products and their profit margins continue to break records.
A recent report from Senator Bob Casey’s (D-PA) office found price gouging is particularly pronounced in the agribusiness industry. Prices for holiday staples like chicken, pork, and potatoes are through the roof, while companies sourcing these food products are doing better than ever profit-wise. This is particularly so in the case of potatoes. Prices for potatoes increased 60% over the last year. At the same time, Lamb Weston Holdings, the largest frozen potato provider in the country, has seen its net income soar; the CEO openly attributed this growth to “the carryover benefits of pricing actions initiated last year.” You would think that companies would work to expand potato production to help ease the situation, but this season’s potato crop was actually the smallest since 2010. According to the report, chicken and pork companies – with very little competition, we might add – are engaging in similar tactics as they intentionally cut production to keep prices high.
Even though corporations have run out of “excuses” to raise their prices, they’re keen to protect the big profit margins they’ve established over the last few years. With that aim in mind, they are now essentially running tests to see how far they can jack up their prices before customers get sticker shock and stop buying their products.
For all these reasons and more, it’s promising that mainstream economists and pundits are starting to take seriously the accusations of corporate price gouging. Early on in the inflation crisis, it was mostly just us, our allies, and a handful of economists who were sounding the alarm about this driving force behind inflation. One academic, Professor Isabella Weber from the University of Massachusetts Amherst, was even mocked after an opinion piece she wrote for The Guardian on the subject went viral. But now, the tide has turned, and our ideas are no longer considered fringe. Over the last year, Lael Brainard (now the Director of the President’s National Economic Council) and Paul Donovan (the chief economist at UBS Global Wealth Management) have both given credence to corporate price gouging in speeches that they have given. Leading figures at the European Central Bank, the International Monetary Fund, and the United Nations expressed concerns that higher corporate profit margins were driving inflation. President Biden publicly rebuked shipping and meat-processing companies over their prices and profit margins early in the crisis; in recent weeks, as the 2024 election campaign picks up speed, he has come out more forcefully against corporate price gouging. Lastly, mainstream outlets like The New York Times, Bloomberg, and The Wall Street Journal even began to report on it as well.
So as inflation continues to cool, corporations must be held accountable if they continue to raise prices, and there are things that Congress can do to compel corporations to stop swindling consumers. They should strengthen antitrust laws to inspire healthy competition in the economy and, in the process, dissuade corporations from conspiring to keep prices high. They can follow the examples of other countries like the UK, Portugal, and Italy by enacting windfall profit taxes on sectors that have abnormally high levels of profitability. Rep. Ro Khanna’s Big Oil Windfall Profits Tax is one such proposal for the oil industry. They can investigate corporate profiteering to its full extent and demand that corporate CEOs testify before Congress.
Corporations were taking advantage of the inflation crisis to raise their prices unnecessarily and make a killing, and many continue to do so now. Congress has the power to protect consumers, and now it has a duty to exercise it.
