- Scoops
- Posts
- Scoop Market Mysteries 10-30-22 (Corporations & Inflation)
Scoop Market Mysteries 10-30-22 (Corporations & Inflation)
🔎 Market Mysteries: Is corporate greed causing inflation?
Market Mysteries of the week
Is corporate greed causing inflation?
Answer:
As with most of today's economic concerns, the pandemic and policymakers' response to it are the main drivers of inflation. Corporations, though, aren't entirely innocent.
What's been getting so expensive?
The costs of
basically everything
, from rent to groceries, have skyrocketed since the pandemic. In the past year, the average price of food has
because everything that goes into that has grown more expensive: flour +24%, eggs +31%, and butter +32%. While the grocery bill keeps growing, the cost of buying your lunch at work or school is growing even faster - up 91% in the past year. On top of that, energy, gas, rent, cars, and transportation have seen some of the fastest price increases in over forty years.
Who's to blame for these higher prices?
First, it was the pandemic, then Russia made it worse, and then the climate
hasn't done us any favors. When the global economy reopened, borrowing was cheap, and consumers had savings they were ready to spend. Businesses couldn't get supplies back online fast enough, though. Employees had to be hired, things needed to be built, and transportation needed to be restored.
to make as many cars as it wants. Trade and
. The US economy only released all restrictions at the start of this year. China, the second-biggest economy, is
The
compounded the disruption. Both countries are responsible for a sizable percentage of global wheat and sunflower exports. Export disruptions pushed food prices higher. Russia is also the third-largest oil producer and a supplier of critical metals for computer, battery, and car parts. Higher energy prices affect the cost of everything.
Climate change has also impacted food production drastically.
Natural disasters and climate events such as droughts, floods, wildfires, and scorchingly high temperatures have
Overall, the world's resources and human production haven't been able to meet our demand for consumption.
Less stuff and more buyers mean higher prices.
Are corporations making it worse?
Corporations are doing what they know how to do. Companies are facing the same rising costs we are, so
they are seizing the opportunity to raise their prices as much as they can to compensate for those higher operating costs, and... maybe a little more
if you'll let them. It all comes down to pricing power - which companies see enough customer demand that they can keep raising prices.
Look at their profit margins to identify whether companies are taking advantage of the opportunity.
Revenue - costs = profit. Revenue is determined by how much you sell and at what price. As costs rise, companies will raise prices to earn at least the same profit per sale. Increasing their overall margin would require them to raise prices over the cost increase or sell more stuff. Most companies are selling less stuff.
If you've flown in the US lately, you have likely felt the effects of getting less service for a higher price.
United Airlines is
per seat. It expects profit margins to be 10% higher than in 2019 this quarter.
It's happening in food too.
Tyson Foods, which controls a fifth of the US chicken market, saw its stock price
this year as it w
Kroger and Albertsons, the two largest grocery store chains in the US, each increased their profit margin by 43% and 84%, respectively. The two recently announced a merger to
.
Rent is another expense that corporations might be driving up
. Housing costs are a significant component of inflation, making up a third of the Labor Department's inflation index, and have risen almost 7% in the past year. Much of that price increase has been due to the same supply and demand issues we've discussed, but some areas are different. While landlords have historically been individuals, corporations have invested heavily to control more single-family real estate since 2008. They have a history of
. In some places like New York City, corporate owners now hold almost
.
What's being done to address the escalating prices?
Policymakers are trying to restore the supply-demand balance by reducing demand and slowing spending.
The Federal Reserve has been raising interest rates to make borrowing more expensive and saving more attractive. High mortgage rates have deterred buyers, decreased housing demand, and
. That's the effect the Fed wants broadly.
Restricting the economy also means fewer available jobs and likely higher unemployment.
The Fed watches wage growth as a critical driver of inflation. They will keep restricting economic activity to slow rising incomes and decrease consumers' ability to spend and afford higher prices. Policymakers focus more on limiting wage growth than profit growth, so the workers will be the first to feel the effects.
Are you prepared for a more challenging jobs market?
âš¡The Share Scoops Team
Love your daily scoops? Share this email with a friend!
You have made referrals
Reply