“We’re seeing this expansion of margin under the cover of, ‘Oh, it’s a general inflation problem, we can’t help it,’ Paul Donovan of UBS said Thursday.
“We’re seeing this expansion of margin under the cover of, ‘Oh, it’s a general inflation problem, we can’t help it,’ Paul Donovan of UBS said Thursday.
Yeah that seems like bullshit. If they raised prices proportionally profit levels would remain flat.
Not necessarily. Let’s say I’m a corporation, who sells a widget for $100. It costs me $80 to produce said widget and I keep $20 in profit. Now, let’s say inflation is 25%. My cost per widget is has increased to $100. To keep up with inflation, and to maintain the same percentage of profit, I need to raise my prices to $125. This gives me a record profit of $25 per widget, while still maintaining the same proportion of profit as before.
If we only discuss the dollar value in terms of profit, it’s hard to tell if record profits are coming from inflation or price gouging or both. If the percentage profit remains unchanged, then it’s likely more to do with inflation than price gouging.
Why does profit need to increase as a percentage? If prices were only raised to $120 you’d still he making the same amount of profit
Because that is how inflation works. If it helps here’s an example using the big Mac index.
Say pre inflation, I make enough profit to buy 5 big Macs. After inflation, my profit is now only enough to buy 4. In real terms, my profit has gone down, if I don’t increase it proportionally to inflation. Thus, by keeping profits to only $20, profits would have decreased in reality (just like the example of the worker bee below when their pay doesn’t increase proportionally with inflation).
Of course, this is a very simplistic view where inflation is the only factor. There may be other pressures that would make it difficult for a company to raise their prices to maintain the same profit ratios, i.e. supply/demand constraints.
The general point is with inflation, the raw numbers of everything increases. If you see a report about record profits, but they are only speaking in $ terms, don’t assume it is price gouging. There isn’t enough info given either way, and it is important to avoid falling into the trap of using incomplete data to confirm your biases.
Isn’t this $5 extra you’re overcharging the consumer, because inflation would affect the supply chain as well. 25% would raise cost of production to $100, keep your profit at $20 and cost to consumer will rise to $120.
Of course, demand on a widget might rise or fall during inflation too.
In real terms the $25 post inflation is the same value as the $20 was pre inflation.
Look at it another way. You are a worker bee who makes $20 an hour. If inflation is 25%, your employer should give you a raise to $25 an hour to maintain your compensation at the same level. If they do not, they have effectively given you a pay cut.
That just sounds like a profit circle-jerk, imo.
Widget Inc. is inflating their prices. Inflation doesn’t happen in a vacuum, right? Corporations are the one’s inflating the prices. So, they also have to increase their profits to match their own inflationary actions?
Net profit is net profit, and we are seeing corporations’ nets soar far higher than inflation rates. I don’t see how increasing their profits is necessary just because their own inflated prices deem it.
Reminds me of this Woody Woodpecker episode
Corporations don’t cause inflation. Inflation is a society wide phenomenon, largely due to long-term monetary policy (i.e. the fact that the money machine spent much of the last 20 years pumping money into the economy for bottom of the barrel interest rates).
And yes it can create a spiral where corporations preemptively raise prices because they anticipate inflation to impact their cost of doing business, thus causing more inflation.
I agree that monetary policy can be a driving factor, but so can many other factors. Demand increased during the pandemic as supply dropped. Also, cost-pushes seemed to be a big driver in the current cycle, mixed with rising wages. It’s reductive to say that inflation is caused by monetary policy, especially considering the current inflation is worldwide with very different monetary policies among the different countries effected.
However, all of it comes down to an effort to increase profits. Whether it’s pulled by demand, pushed by costs, monetary policy, rising wages - the inflated prices all happen because profits can be increased for corporations at that moment. Corporations are not increasing prices solely to cover higher costs for materials and/or labor. If they were, margins would remain the same. The margins are increasing rapidly.
Lots of factors drive inflation, but prices increase because corporations want to increase profit margins.
I think we probably agree more than you would assume. My initial point was simply to be skeptical of any article that uses straight dollar amounts when reporting record profits. Yes it can be a sign of greedy corporations price gouging, but isn’t necessarily. Just because you or I assume it is likely to be corporate greed, it’s important to avoid confirming your biases with incomplete data.
You point it out yourself, the actual indicator of corporations taking advantage of the situation is the profit margin, not the pure dollar increase.
Agreed. Profit margins are a much better indicator of how much corporations are taking advantage of the situation