Today's social media "analysts" insist record-high corporate profits are driving inflation. This is backwards. Don't believe me? Here's how:
Suppose you make and sell widgets. Your expenses are $100 for each widget, including materials, labor, shipping, factory maintenance, and everything else. You sell them for $105, giving yourself $5 profit and a 5% profit margin per piece.
Now suppose inflation drives up the cost of your raw materials. Increased fuel costs drive up your logistics costs. Your employees demand higher wages. Your vendors are also experiencing increased costs, and pass them along to you through increased prices. It now costs you $120 for each widget.
In response, you raise your price to $126, maintaining your same 5% profit margin, which is still what you need to get out of your business in order to make the venture worth your while, and avoid shutting it down altogether and doing literally anything else with your life instead.
But now, if you manage to somehow maintain steady business in spite of the volatility of the market and the systemic pressures of inflation, you are making $6 profit per widget. This is "record profits," and idiots will attack you on the internet. Never mind the devaluation of those dollars, or the odds this trend will continue. Raw numbers are bigger, so the price inflation is somehow your fault.
Moral of the story: assume people discussing money and economics are clueless. If they fixate on raw numbers, assume something in the percentage is omitted, and vice-versa. Sure, corporate bigwigs are greedy, but vice does not ebb and flow to drive the economic trends we see. There is always more to the story than anyone can fit into a tweet or TikTok video, and nuance is lost as a consequence. Maybe something has been overlooked, or maybe deception was the intent. Either way, always dig deeper.
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Corporate greed isn't even an issue if there is sufficient competition in the marketplace. In that case, corporations can't afford to be greedy. Lack of competition usually comes down to government interference. But certainly when considering corporate profits you have to look at margin and not absolute dollars.
I'm going to post a link to this every time I respond to Robert Reich, since he's one of said "analysts," and an astro-turfed purple check on Substack.
Do you have any idea of the impact on inflation on the profit margin?
Will people still be able to make enough profit even though goods are expensive?
Inflating the money supply always adds economic uncertainty. More dollars/pounds/yuan/whatever chasing the same number of goods and services can only have the result of rising prices. However, the way the new money is added into the economy distorts the effects to the benefit of some at the expense of others. This means a lot of uncertainty. In a sense, money is a unit of measure allowing consumers to compare their economic options. When more is injected into the economy, we have a dishonest unit of measure. It is more difficult for everyone to plan for the future. Everyone knows expenses will be higher. Everyone from workers to corporate fat cats demands higher future earnings and profits. But the uncertainty of how and when the effects of money supply inflation will manifest makes planning a challenge.
Great explanation, thanks! It seems like in this system eventually only the government has enough money to buy the widgets, because they print the money out of nowhere while everyone else is left behind.
At this time, there has been so much inflation in our country that if a product is being produced for one dollar, people do not even have enough money to buy it, so the businesses here are closed. It is happening because the shop rents are not being paid.
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