Do large corporate profits cause inflation?

Markups and business profits in the United States last year were the highest since at least the 1950s, according to an analysis released Tuesday by the Roosevelt Institute, a progressive think tank. This raised questions about a possible link between corporate greed and inflation.

But this isn’t just a story about companies inflating prices to make more money, Mike Konchal, one of the paper’s authors and director of the Institute for Macroeconomic Analysis, told me. “Greed – the only or main cause of inflation?” he asked. “I would say no. This is part of a set of explanations that must be considered.”

The Roosevelt Institution paper sheds light on one of the most important economic questions of 2021: what is the main reason for today’s high inflation – strong demand, supply shortage or rising profits? Those who cite strong demand accuse the Biden administration, Congress and the Federal Reserve of over-stimulating the economy. Those who cite supply shortages point to disruptions caused by anomalies such as the Covid-19 pandemic and Russia’s invasion of Ukraine. Corporate-scale opponents focus on the theory of superprofits.

There is some evidence for all three explanations, according to paper“Prices, Profits, and Power: Analyzing Company-Level Markups in 2021,” Konchal and Niko Luziani, director of the Roosevelt Institute’s Corporate Power Group.

The chart above shows the net profit margin, which is the net income of companies after taxes divided by their sales volume. Konchal and Luciani used S&P Global’s Compustat data, which dates back to 1955. not sales, general and administrative expenses.

Supporting the strong-demand inflation theory is the fact that markup increases were widespread among companies of many types and sizes, suggesting that the strength of economy-wide demand for goods and services was an important driver of price increases, the authors found.

At the same time, markups rose more sharply in industries that suffered disruptions, indicating that supply chain problems were also a factor in inflation. Sectors with large markups included real estate, mining, quarrying and oil and gas. (The biggest markup increase the authors found was in finance and insurance, which is a bit odd since that sector was not clearly a bottleneck.)

The third explanation, the rise in the rate of profit, is not an alternative but rather a complement to the supply and demand explanations. It says companies have taken advantage of the opportunity of strong demand and weak supply to boost their profits. Supporting this theory is the authors’ conclusion that, after adjusting for size, companies that raised prices prior to 2021 are most likely to raise prices in 2021. This indicates that they had a market position that made it easier for them to set prices. increases and causes them to stick.

Konchal and Luziani used a methodology developed for an influential article, “The Rise of Market Power and Macroeconomic Consequences” by Jan De Loker, Jan Eckhout, and Gabriel Unger, which was published in The Quarterly Journal of Economics in 2020. “The big difference is that they find a gradual increase from 1980 to 2015,” Konchal said, comparing the earlier study with his and Luziani’s findings. “This is a very drastic and sudden change in 2021.”

I asked Konchal what he thought Roosevelt’s article meant for public policy. He said it showed that “there are opportunities for those profits to be driven down” due to competition, antitrust enforcement, or presidential chatter (which he called “pulpit hooligans”). He said that already signs national accounts data not included in Roosevelt’s article says that the rate of return fell slightly in the first quarter of this year from recent peaks and could fall further. The document also supports the case for legislative and administrative action to address supply chain bottlenecks and for the Federal Reserve to be “more patient and less unsustainable” in raising interest rates, he said.


Low-income women with children face a high lifetime “marriage tax” that discourages them from getting married. new research economists Elias Ilyin of the Federal Reserve Bank of Atlanta, Lawrence Kotlikoff of Boston University, and Melinda Pitts of the Federal Reserve Bank of Atlanta. The three researchers went beyond federal income tax and analyzed the impact of all major federal and state programs such as Medicare, Medicaid, and Section 8 housing vouchers. Benefits are based on family income, so starting a family through marriage tends to lower benefits per person. Economists estimate that if there were no financial punishment for marriage, women with children, in the bottom fifth of incomes, would have 14 percent more marriages.

“Given the importance of children living with both parents and the economic benefits of creating and maintaining a nuclear family for both children and adults, exploring ways to make marriage tax-neutral seems highly rewarding,” the paper concludes.


“Therefore, we cannot simply borrow or buy science in third world countries from those who are ahead of us. We can accept pure science as it is, but we must do most of the applied science ourselves.”

— Arthur Lewis, speech at the Nobel Banquet, 1979


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