Struggling with growing inflation? (Which was arguably 5.7% last month, not 3.5%, if you use the original definition and not the 2020 one that changed the perception of inflation.) The cost of gasoline? Of diesel? Of fuel oil? Of food?
If only you could have done something, like cut back on coffee out of the house or on avocado toast? Or on utilities or taxes or healthcare or education for you or your kids? You should have taken a page out of the corporate finance book.
How Corporations Have Been Struggling Through
Below is a graph from the Federal Reserve Bank of St. Louis, documenting the rise in the money corporations made, growing to a total of $4.39 trillion.
And a second graph from the St. Louis Fed with profits and the Consumer Price Index to show how each changed in an apples-to-apples comparison.
About a year ago, I wrote about how corporate profits had rocketed upward since the Covid-19 pandemic. Ricardo Marto of the St. Louis Fed had used data from the Bureau of Economic Analysis He found that the share of national income that corporate profits composed averaged 13.9% between 2010 and 2019. By the end of 2024, they were 16.2%. Employee compensation as a share of national income had been 61.8% during that 2010-to-2019 period. By the end of 2024, it was 61.6%.
The jump in profitability primarily came from a few industries (listed from higher to lower with the increase in profits): retail trade ($153 billion to $314 billion), construction ($68 billion to $168 billion), wholesale trades ($132 billion to $247 billion), manufacturing of durable goods (numbers not provided), and healthcare and social assistance (numbers not provided). They were 73% of the post-pandemic profit increase.
Even as costs had exploded due to reduced availability of goods from 2020 through 2021, companies managed to charge enough over their increased costs to become much more profitable.
Where did those extra profits go? About 76% were increases in dividends that rewarded shareholders. Another 15% were retained profits. And then 9% went to increased corporate income taxes.
What’s Facing You
You can see how, by being a bit prudent like big corporations, you, too, could have easily outpaced inflation, with as much as you needed in your bank account.
There is an interesting difference in how inflation affects companies and people. All face increased costs.
However, companies can and generally do pass on their increased costs to their customers, along with a profit markup, because that is typically how businesses price their products and services. When their costs go up, they mark prices up additionally because of the extra expenses to handle the higher prices.
As a result, your extra cost of living includes companies’ additional business costs and additional profits as well.
Notice, too, that inflation isn’t an absolute shift over all time. Sometimes there is deflation, and we’ve seen that in areas like food and energy, where there is regular volatility. But generally, not. Prices rise and stay at the new level. So, for the most part, profits continue to accumulate for corporations. Cost of living continues to accumulate for people.
Bank of America’s BofA Global Research chief investment strategist, Michael Hartnett, estimated that by the November midterm elections, if monthly average of CPI were just 0.1%, annual inflation could fall toward 3.0%. If the monthly average were 0.4%, as it was recently, inflation could surge to 5.2%, as Seeking Alpha reported.
The Federal Reserve Bank of Philadelphia’s second-quarter survey of professional forecasters expected that headline CPI would average 6.0%, up from their previous expectation of 2.7%, largely based on energy and food prices. Core CPI, excluding food and energy, would be 3.2%.
The fall could be a tough period for many, assuming we’re talking about consumers and not companies, which could be expected to embrace new profit highs.
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