Corporate profits are being challenged by market forces, diminishing pricing power.
Two years ago, many were of the view that price gains would be temporary and would vanish as the pandemic’s damage healed. Instead, inflation has turned out to be anything but transitory, spreading to nearly every sector across economies. The search for root causes has been intense.
Central banks and governments are certainly among the main culprits, having implemented pandemic responses that were often too big, too wide and too long-lasting. However, fiscal policy has normalized and central bank leaders have responded with the most aggressive tightening campaign in decades. Pandemic-driven supply chain problems were early contributors to inflation but have largely been solved. Commodity prices are well below their recent peaks. Why, then, are price increases still rampant?
High inflation did not put a dent in corporate profits; higher costs of inputs were passed along to final prices, squeezing household incomes. But some price moves seemed too rapid and disproportionate to be explained by costs alone. Hence, “greedflation,” where corporations are seen as gouging consumers and fueling inflation, is no longer a fringe theory.
Businesses always set prices to maximize profits. When changing demand patterns and stimulus makes buyers willing to pay higher prices, sellers capitalize. But when prices of goods and services grow more rapidly than input costs, it attracts greater attention. Recent remarks from some central bankers and other prominent observers have reflected some concern that this is the case today.