Yahoo Finance 'Corporate greed' is fading
No single thing caused the bout of high inflation that beset the US economy for the last two years. But many Americans think greedy businesses jacking up prices had a lot do to with it. If they’re right, consumers are finally set to win a round as businesses lose some of their pricing power.
The latest inflation data shows a welcome easing of overall price levels, with the annualized inflation rate dropping from 3.7% in September to 3.2% in October. Financial markets think that’s great news, since it strongly suggests the Federal Reserve is finished raising interest rates to fight inflation. The evidence: a surge in stock values after the Nov. 14 inflation report as investors bet that interest rates have topped out.
If inflation really is in retreat, the consequences will go much deeper than a one- or two-day stock market rally. “What the market doesn’t see from the [inflation] data is this sudden loss in corporate pricing power and a renewed leg of earnings estimates reductions coming our way,” David Rosenberg of Rosenberg Research wrote in a Nov. 15 analysis.
A loss in pricing power means companies are losing their ability to pass along rising costs, or to raise prices by more than their own costs have risen. That’s consistent with consumer shopping patterns showing up in the inflation data and other economic reports.
Target, for instance, reported a year-over-year drop in sales in its third quarter earnings report on Nov. 15—blaming pickier consumers, in part. Other major retailers are enduring similar sales declines. Overall retail sales dipped in October. “The consumer may be starting to run out of gas,” Oxford Economics wrote to clients on Nov. 15.
All of this makes sense. In fact, many economists expected spending to slow some time ago. COVID stimulus from 2020 and 2021 is largely exhausted. Excess savings accumulated during the pandemic are dwindling. Rising rates have made it costlier to borrow and the resumption of student loan payments after a 42-month moratorium is an added burden for millions of borrowers.
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Weakening demand normally brings prices down, since sellers have to compete harder to keep customers, and lowering prices is one way to compete. That is just barely starting to show up in inflation data. Overall, prices of many things are still rising, they’re just rising by less than they used to be. Yet Yahoo Finance found 11 categories of products getting cheaper, the biggest set of declines since we started tracking monthly price changes in 28 broad categories in 2021.
Several factors caused the price hikes that sent inflation to a 40-year high of 8.9% in June 2022: supply chain disruptions during the COVID pandemic, a surge of new demand for goods when people were stuck at home, new spending money from COVID stimulus, and a surge in energy prices related to Russia’s invasion of Ukraine.
Yet big companies get much of the blame, probably because they’re the ones selling the costlier products. In a recent Yahoo Finance-Ipsos survey, 26% of respondents said “corporate greed” was the biggest cause of inflation. That was the second-most common response, after “current government policies,” which got 27% of the vote.
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Americans are probably putting more blame on companies than they deserve. Corporate profits did shoot up during the pandemic, but part of that was the effect of government stimulus meant to keep businesses solvent, and employees on the clock. Many companies also cashed in on the unexpected spending boom that took off as the COVID recession abruptly ended after a mere two months, and Americans went on a shopping spree.
But corporate profits have leveled off during the past year, and there has even been an “earnings recession” for much of 2023, with aggregate earnings per share declining for several consecutive quarters. Corporations might have been profiting at the expense of consumers in 2022, but not so much in 2023, as they hit the limit of price hikes shoppers are willing to absorb.
Rosenberg points out that a reduction in pricing power means that future corporate profits could be lower than expected, which could ding the very same stocks that are soaring in celebration of receding inflation. Analysts are, in fact, cutting their estimates for future profits. That could eventually hurt shareholders, but even if it does, it will bring some overdue relief to shoppers.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman.
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