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New report unsurprisingly shows that profiteers have raised prices well above the rise in costs [1]

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Date: 2023-12-07  

A new report from progressive UK.-based think-tanks IPPR and Common Wealth says profiteering played a major role in jacking up prices far above the rise in costs, reinforcing a previous but narrower study showing such an impact. Among other things, the researchers called for a global corporation tax to curtail unrestrained profits.

The team analyzed 1,350 companies listed on stock markets in the United Kingdom, United States, Germany, Brazil, and South Africa. It found that profits rose by 30% among firms listed in the U.K., this increase being primarily driven by 11% of them garnering super profits in the post-pandemic world. In the U.S. the profits were even more excessive, but also more broadly based, involving 33% of companies.

Giant energy companies, mining companies, and monopolistic food companies all saw their profits leap ahead of inflation after the February 2022 Russian invasion of Ukraine. The report noted, “Because energy and food prices feed so significantly into costs across all sectors of the wider economy, this exacerbated the initial price shock—contributing to inflation peaking higher and lasting longer than had there been less market power.”

Technology companies, telecommunications, and banking also raised their profit margins with big price hikes. “Such companies have been able to protect their profit margins or even increase them, generating excess profits through a combination of high market power and global market dynamics,” the report said.

Some examples of companies who boosted profits the most from the pre-pandemic average: ExxonMobil—profits of $18.9 billion rose to $66.6 billion; Shell—$20 billion rose to $55 billion; Archer-Daniels-Midland—$1.77 billion rose to $4 billion; and Kraft Heinz—$333 million rose to $2.3 billion.

Monopolistic market clout drove some of those higher profits. “This has caused significant harm to the economy as a whole,” according to the report. “Global GDP could be 8% higher than it is now had market power not risen. Labour income is likely significantly lower, and economic dynamism is weaker—with poorer choice, worse product quality and fewer economic opportunities—than in a counterfactual world where big corporations were less dominant.” From the report:

Finding 4: The largest four food manufacturing firms had among the largest increases in profits Food production has received particular attention recently due to the large social cost of rapidly rising food prices. Moreover, as highlighted above, Weber et al (2022) argued that food prices play an outsized role in causing inflation to ripple through the economy. Clapp and Howard (2023) highlight that only four companies—Archer-Daniels-Midland (ADM), Cargill, Bunge, and Dreyfus—control an estimated 70-90 per cent of the world grain market. UNCTAD (2023) find that they account for about 70 per cent of the global grain market share and they registered “a dramatic rise in profits during 2021–2022”. UNCTAD (2023) argues, as we do above, that market power can exacerbate price shocks and lead to prices rising more than warranted by cost increases.

Profits for ADM, Bunge, Cargill and Louis Dreyfus rose 255% in 2021.

The researchers made clear they were not asserting that profits were the only cause of inflation, stating:

We argue that market power by some corporations and in some sectors—including temporary market power emerging in the aftermath of the pandemic—amplified inflation.It made price increases peak higher and remain more persistent than they would have been in a world with less market power. To be clear: corporate profits were thus not the sole driver of inflation, nor are dominant corporations to blame for the energy shock caused by Russia’s invasion of Ukraine. But we argue that their market power exacerbated the fallout—and that this is not sufficiently captured in the prevailing macroeconomic debate or in workhorse models. We also highlight that, unlike what seems to be commonly claimed, profit margins do not have to rise in order for profits to contribute to inflation. In an energy shock scenario, if costs were equally shared between wage earners and company owners one would expect the rate of return to fall as firms do not increase prices fully to make up for higher costs, and wage earners do not fully keep up with inflation. But this is not what happened. A stable rate of return—for example, as seen in the UK—suggests pricing power by firms, which allowed them to increase prices to protect their margins.

The researchers recommended fiscal and other policies to protect economies from external shocks like sharp energy price rises, a fresh approach to competition policy, and, sure to stir the most pushback, a global approach to taxing excess profits, defined as anything above 10% more than previous averages.

In mid-November, Sen. Bob Casey, chairman of the Subcommittee on Children and Families released a report —“Stuffing Their Pockets: How Big Food and Agriculture Businesses Are Making Your Holiday Meals More Expensive.” From the report:

This report examines how the agribusiness companies that process Americans’ food have increased prices for everyday staple foods and raises questions about why those price increases are necessary. These same companies have a history of engaging in price-fixing, colluding to raise prices, anti-competitive conduct, and touting their ability to raise prices without limit. [...] Finally, the Department of Justice recently initiated a lawsuit that suggests almost the entire chicken, turkey, and pork industry are engaged in price-fixing practices. The DOJ says the industry sent “sensitive information related to price, cost and output” to a firm called Agri Stats Inc., which then told them how much they should charge for their products. According to the Department of Justice: “Executives at some of the country’s largest meat processors testified that they could not recall any examples in which their companies used Agri Stats information to lower their sales prices to gain market share. An executive at Smithfield, a pork processor, summarized Agri Stats’ consulting advice in four words: “Just raise your price.” [...]

That seems to be a widely favored mantra.

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