Fed: Companies boasted ‘unusually high profits’ after supply issues eased

Companies are holding onto higher profit margins and keeping prices elevated even as the supply chain problems that initially triggered high inflation in the aftermath of the pandemic are being resolved, the Federal Reserve noted Wednesday.

Anecdotal evidence about the performance of the economy compiled in the Fed’s Beige Book for May added weight to arguments that the current phase of inflation is due mostly to outsized markups and the ability of firms to keep prices higher simply because they can.

“Overall, contacts reported far fewer supply chain disruptions — instead noting that many sectors of the economy are enjoying unusually high profit margins,” the Philadelphia Fed reported in its summary of economic activity.

“Several contacts noted that their suppliers or their competitors are maintaining high profit margins — that competition has not emerged to drive prices down for the consumer.”

The Fed also saw evidence of consumers accepting these higher prices, particularly for manufactured goods.

“Prices increased modestly on average as cost pressures eased further. Pricing activity was mixed among manufacturers, as some held prices steady and others enacted sharp price increases with little pushback from consumers,” the Boston Fed said of economic activity in its sector.

Consumer spending boomed in April, rising by a hefty 0.8 percent and fueling higher price growth as measured in the personal consumption expenditures (PCE) price index. The PCE ticked up sharply in April, though it has been coming down since last June.

In the Chicago Fed’s district, a number of businesses reported to the Fed that increases in shipping costs had slowed considerably, “particularly for trucking and ocean freight” while Fed analysts there ascribed rising prices there to “solid demand.”

The role of profits in the current inflation cycle has been receiving increasing attention, as other causes have receded in likelihood. A recent study from the San Francisco Fed found that labor-cost growth has accounted for only about 0.1 percentage points of recent core PCE inflation.

“It’s hard not to be open to the possibility that firms use some opportunities to raise prices more than what they would normally do on account of it being socially acceptable,” Brown University economist Gauti Eggertsson wrote online on Friday.

Eggertsson took issue with labeling profit-led inflation “greed-flation,” as it’s been nicknamed.

“Firms are in the business of maximizing profits. They are not charities. Is that ‘greed’?” he said, implying that firm behavior and consumer tolerance were fundamentally at issue.

While profits are still way higher in objective terms and as a share of unit value than they were before the pandemic, they have been coming down along with inflation more broadly, declining in the last two quarters of 2022 and the first quarter of this year.

Inflation as measured by the consumer price index (CPI) has fallen to a 4.9-percent annual increase from a higher of 9.1 percent last June.