Time to take a long, hard look at corporate pricing power

Large companies have exploited the pandemic and the Ukraine war to drive their profits higher, protecting dividend payments to shareholders: that is the accusation levelled at them by unions and a growing number of academics and City economists. They believe the corporate data from 2019 onwards reveals systematic and excessive price increases that can fairly be considered price-gouging or, even more emotively, “greedflation”.

Andrew Bailey, the Bank of England governor, says he has no evidence excessive profits are factors pushing up inflation, though he was concerned enough to tell firms during a BBC interview that they needed to show restraint.

True, there is no direct evidence that executives in the US, Europe or Japan discussed how they should make the most of a crisis by loading prices, stealthily and excessively, to enrich their shareholders at the expense of consumers. But critics of corporate behaviour during the pandemic and Ukraine war say profit and loss accounts tell their own story.

Analysis of the top 350 firms listed on the London Stock Exchange by researchers at Unite, the UK’s largest private sector trade union, showed average profit margins increased from 5.7% in the first half of 2019 to 10.7% in the first half of 2022. Procter & Gamble, the US-listed multinational, has protected a profit margin in excess of 17% for the past three years. Its chief executive, Jon Moeller, received a 44% pay increase to $18m (£14.7m).

Albert Edwards, a senior analyst at Société Générale, believes the rise in inflation to double digits in the UK, US and Germany over the past year was made worse by price gouging. “Companies [have] under the cover of recent crises, pushed margins higher,” he said in a note. “And, most surprisingly, they still continue to do so, even as their raw material costs fall away. Consumers are still ‘tolerating’ this, possibly because excess [government] largesse has provided a buffer.

“My own view remains that headline inflation will collapse below zero as food and energy comparisons turn deeply negative through this year. But beware corporate ‘greedflation’ still lurking in the undergrowth.”

Paul Donovan, chief economist at UBS Wealth Management, says there needs to be a rebirth of the rip-off Britain campaign popular in the recession that followed the 2008 financial crash. “Typically, one would expect about 15% of inflation to come from margin expansion, but the number today is probably about 50%,” he said.

A study last year by the Guardian found profiteering by firms putting up prices apparently because of raw materials costs. The fertiliser company Nutrien’s profits shot up by about $1.2bn over two years on “higher selling prices [that] more than offset higher raw material costs and lower sales volume”.

Isabella Weber, an economist at the University of Massachusetts Amherst, has shown which kinds of companies are able to benefit from a crisis, giving academic support for what she considers a rational capitalist reaction to a crisis. Bailey tarred all companies with the greedflation brush, implying they all have pricing power to maintain profits. Weber says only some do – but their prices matter.

Now is the time for the central bank or the Treasury to sponsor research into the subject. We are

all poorer for lack of understanding about corporate pricing behaviour.

Critics believe data from 2019 onwards reveals excessive price increases that can fairly be considered price-gouging