Corporations are currently enjoying record or near-record profit margins, particularly since the second quarter of 2021 when after-tax corporate profit margins reached 10.7% in the US, their highest point since 1947 when adjusted for inventory valuation and capital consumption. Although they've decreased slightly since then, they remain high. For example, Procter & Gamble's share price surged due to increased profit margins, despite lower sales volumes, as prices for its products rose by approximately a tenth. Executives were compelled to defend these price hikes, attributing them to rising input costs, even though inflation in the US stood at 4.9% at the time.
These high profits during a cost of living crisis have led to accusations of "greedflation," with critics like former US Secretary of Labor Robert Reich questioning why companies with record profits are passing on increased costs to consumers rather than absorbing them. He suggests they do so "because they can." This situation is prompting calls for policymakers to investigate "greedflation," with some advocacy groups arguing that companies are exploiting geopolitical and supply issues to increase their bottom lines beyond what's necessary.
The unprecedented profits carry significant reputational and potential legal risks for companies, according to experts like Nir Kossovsky, CEO of Steel City Re. He advises company boards to engage in robust discussions about pricing strategy and ensure their risk management processes are thorough and transparent. However, not all analysts fully attribute high profit margins to "greedflation"; some, like ING, suggest that companies might be compensating for losses incurred during COVID-19 lockdowns or building up financial reserves. The concern is that if demand continues to accelerate, it could lead to higher interest rates, impacting both stock and bond markets as "good economic news" becomes "bad news for markets."
