High Corporate Profit Margins Contribute To Inflation

Do higher margins contribute to inflation? Well, profits reflect prices minus costs.

Since the end of 2019, prices are up 17%, outpacing both labor and nonlabor costs. The result: Profit grew by 41%. If profits had grown at the same, slower rate as labor costs, that would have translated to a cumulative price increase of only 12.5%, and an average annual inflation rate roughly 1 percentage point lower.

Between late 2019 and the second quarter of 2022, corporate profit margins shot up to 17% from 13.4%. (These are pretax profits as a share of revenue, minus inputs such as imported parts, and excludes financial companies.)

The reason was obvious: As the economy emerged from pandemic shutdowns, companies faced a wall of demand they couldn’t meet because of shortages of labor, parts, transportation and other inputs—a recipe for pricing power and high margins.

As of the third quarter of 2023, the supply problems had largely been fixed, and profit margins had fallen, but only to 16.4%. Outside the pandemic period, that is the highest since the 1960s.

Take autos. In the two years ended in February 2022, new-vehicle prices shot up 19%, according to Labor Department data, as a shortage of semiconductors stymied supply.

The chip shortages have ended, but in the past year prices are still up 0.4%