Why are prices still so high? Corporate greed, some say.

Why are prices still so high? Corporate greed, some say. - Business and Finance - News

The Persistent Issue of Corporate Profits and Inflation: A Struggle for Small Business Owners and Consumers Alike

Nick Rosolino, the owner of a small cleaning business in rural Maine, feels dismayed as he witnesses big corporations reaping substantial profits. Alongside his wife, they are finding it increasingly challenging to break even with the escalating costs of the products they use, which have seen a significant price hike in recent years.

While supply chain problems and high demand may have fueled inflation during the early stages of the pandemic, Rosolino is convinced that another critical factor contributing to the soaring prices and their persistence is corporate greed. According to this 51-year-old entrepreneur from New Gloucester, Maine (approximately half an hour from Portland), the relentless pursuit of profits drives many CEOs to raise their prices, making it harder for small businesses and individuals alike to cope.

Rosolino reluctantly increased his prices by 15% earlier this year, the first hike since the pandemic began. This adjustment will help him afford the eco-friendly products his business uses, such as a 28-ounce bottle of all-purpose cleaner that now costs $4.29 – a stark contrast to its previous price of $2.49.

As the economic mood among many people sours, Rosolino is not alone in his sentiments about corporate profits being a primary reason for their discontent. Numerous News Finder readers have shared similar concerns. President Joe Biden also acknowledged the issue during his State of the Union address on March 1, 2023, highlighting it as a significant talking point.

Biden criticized corporations for prioritizing profits over consumers, stating that they raise prices to pad their bottom lines and shrink product sizes while maintaining the same price – a practice known as “shrinkflation.” Biden’s sentiments were echoed last week by Cookie Monster, who lamented about the trend on Sesame Street.

Corporate America has enjoyed healthy profit margins in recent years, even as people faced challenges to keep up with the surge in prices. Inflation reached record highs of 40-years in 2023, and though it has since decreased, consumers have yet to experience a meaningful relief.

Profit margins for nonfinancial firms are expected to remain elevated in 2023, as they benefit from lower costs. Companies tend to be slower to reduce their prices when costs decline compared to raising prices when expenses increase. According to Goldman Sachs analysts, profit margins were higher in 2023 than before the pandemic.

Corporate profits have contributed significantly to inflation, though experts disagree on the extent. A report from Groundwork Collaborative, a progressive advocacy group, argues that corporate profits accounted for 53% of inflation during the second and third quarters of 2023 and 34% since the pandemic’s onset. However, the Federal Reserve Bank of Kansas City found in a report that corporate profits contributed 41% of inflation during the economic recovery following the pandemic-induced recession. This is less than the historical average in prior recoveries.

The increase in corporate profits can be expected when prices rise due to supply and demand imbalances, according to Neil Bradley, chief policy officer at the US Chamber of Commerce. Despite this strong economic climate from a consumer standpoint, demand remains significantly higher than pre-pandemic levels when profit margins were lower.

To control their own costs, companies sometimes resort to shrinking product sizes – a practice known as “shrinkflation.” This strategy allows them to maintain prices while reducing expenses. However, consumers are more sensitive to price changes than size changes, according to the Bureau of Labor Statistics. Household paper products and snacks are the most common items that manufacturers downsize. Though shrinkflation affects consumers’ costs, particularly at the grocery store, it has a minimal impact on overall inflation.

Despite these trends, many Americans continue to face financial struggles as prices remain high, particularly at the supermarket. Heather Vargas and her family in Citrus Heights, California, are among those affected by this situation. Their most recent grocery bill totaled $165 – a significant increase from the less than $100 they paid last year. Vargas, who cares for a special needs child and works as a delivery driver when available, and her husband (a truck driver) have had to cut back on spending and carefully plan meals to make ends meet. She was dismayed by W.K. Kellogg CEO Gary Pilnick’s suggestion for families looking for more affordable options to eat cereal for dinner, which she perceived as a dismissive comment from a well-compensated executive.

Companies have continued their practices due to consumers’ ongoing spending, according to Aaron Hackman, a 38-year-old administrator at a college from Fort Lauderdale, Florida. He believes corporations have become accustomed to raising prices during the pandemic and are unwilling to change their ways despite consumers’ struggles.