The Washington PostDemocracy Dies in Darkness

As inflation spreads, rising prices fuel charges of corporate greed

Liberals allege companies are taking advantage of the moment, but companies say much more complicated economic forces are at work

Fuel prices at a gas station in Menlo Park, Calif., on March 21. (Jeff Chiu/AP)
10 min

Procter & Gamble is charging more for diapers, laundry detergent, razors and just about everything else it makes, joining scores of corporations in a display of market power that is shocking consumers who grew accustomed over the past decade to prices virtually flatlining.

To P&G executives, the price hikes are unavoidable at a time when costs for wages, freight and raw materials are rising by the largest amount in two decades. Failure to act, the company says, could lead to thinner profits, layoffs, investment cuts and, eventually, a lower stock price. Plus, after years of balking at higher prices, consumers now are swallowing them.

But to liberals, P&G and its corporate kin are not reacting to inflation so much as causing it. Companies that are raising prices for beer, chicken, toys, gasoline and medicine, the critics say, are just using inflation as an excuse to pad record profits and to reward Wall Street.

“P&G is a great example. It’s a huge, huge company with an enormous amount of market share,” said Rakeen Mabud, chief economist of Groundwork Collaborative, a nonprofit that is critical of corporate behavior. “And it throws its weight around in a number of different ways and uses that power to take advantage of the situation.”

Oil price shock jolts global recovery as economic fallout from Russian invasion spreads

The debate comes as a new Gallup poll this week found 17 percent of Americans believe inflation is the nation’s top problem, more than twice the share in January and the highest figure since 1985. As prices have chugged higher in recent months, liberals’ insistence that corporations are culpable has intensified. Sen. Bernie Sanders (I-Vt.) chastised fast-food company Wendy’s in March for lavishing millions of dollars on its chief executive and spending $100 million to repurchase shares of its stock, saying the strategy represented “corporate greed.”

But “greed,” by itself, is a poor explanation for rising prices, according to investors, executives and many economists. After all, CEOs presumably were just as thirsty for profits during the decade before the coronavirus pandemic when most were unable to raise prices without driving customers away and annual inflation averaged less than 2 percent.

In practice, “corporate greed” is really shorthand for a sweeping critique of contemporary American capitalism, reflecting objections to the degree of competition in the U.S. economy, the priority afforded shareholders and the riches lavished on CEOs, according to economists on both sides of the debate.

“Everyone is talking about inflation & giant corporations have figured out that’s an opportunity to not only pass along their own costs, but also do some price gouging to pad their profits,” Sen. Elizabeth Warren (D-Mass.) tweeted in late March. “We must enforce our antitrust laws & promote competition so consumers don’t get ripped off.”

Where corporate critics see unrestrained greed and exploitation of vulnerable consumers, however, business-friendly Democrats detect the unremarkable workings of supply and demand.

Thanks to nearly $6 trillion in government spending, consumers — taken as a whole — are flush with cash. Surging spending on products like laptops and furniture, coupled with snarled supply chains, is resulting in higher prices, they say.

“In a trivial sense, it’s true that businesses set prices to maximize their profits. They also choose wages and the level of employment to maximize profits,” said Jason Furman, President Barack Obama’s top economic adviser, who called complaints about corporate greed “just political ranting.”

Liberals’ diagnosis of what ails the U.S. economy has implications for the Federal Reserve’s response to the highest consumer price inflation in 40 years, antitrust enforcement, and public tax and spending choices.

Economists like Mabud worry that the Fed will hike rates too much, driving up joblessness and effectively making people poorer. Instead, policymakers should tackle features of the economic system that are rigged against the average American, such as powerful monopolies and inadequate labor rights, she said.

“We know corporate executives are engaging in predatory, exploitative behavior,” she said.

In late March, Sanders introduced legislation that would impose a 95 percent “excess profits” tax on the earnings of the largest U.S. corporations. Taxing whatever companies earn above their average inflation-adjusted profits for the five years before the pandemic would garner $400 billion per year, he said.

President Biden warned oil companies against “profiteering” after the war in Ukraine drove gasoline prices past $4 per gallon, and the White House also has criticized shipping companies and brewers for wielding excessive market dominance.

In February, Warren castigated several corporations on Twitter for similar practices, including Tyson Foods and the Kroger supermarket chain, and criticized P&G for raising prices on several products and “touting more to come.”

The Justice Department in February launched an initiative to go after companies seeking “illicit gain” from ongoing supply chain disruptions.

But the options for immediate government action are limited. In legal terms, “price gouging” is generally a violation of state laws that prohibit businesses from jacking up the price of essential goods during declared emergencies. Otherwise, there is no law against charging what the market will bear.

Companies targeted by liberal lawmakers have been reluctant to trade rhetorical punches. Tyson declined to comment, while Kroger did not respond to a request for comment. Wendy’s defended its CEO’s compensation as “competitive and within industry norms.”

Corporations banked a near-record $2.7 trillion in after-tax profits during the fourth quarter of 2021, almost twice as much as in the same period in 2009. But the average operating profit margin for companies in the S&P 500 index — how much is earned from each additional dollar of revenue — peaked in the middle of last year and is now 12.7 percent, about unchanged from 2018, according to Yardeni Research.

Carlos Gutierrez, who ran Kellogg’s Mexico business in the 1980s when annual inflation approached 100 percent, said refusing to raise prices or cut spending in response to rising input costs would cripple a company.

Growing profits mean funds for research, new product development, marketing and wages, he said. Shrinking profits mean less money for all of that — and greater pressure to reduce costs, including by laying off workers.

“You have to fight to protect margins,” he said. “Investors want to see a certain amount of margin and growth in earnings, if they’re going to invest.”

P&G’s decision last year to begin raising prices by mid- to high single-digit percentages came after a decade of holding them to an annual average of 1 percent, according to Barclays.

As supply chains were overwhelmed during the first year of the recovery, the company’s annual costs ballooned by $2.8 billion. Raw materials and shipping were the chief culprits, coupled with unfavorable foreign exchange movements.

Chief financial officer Andre Schulten told investors in February that the price hikes were “tailored” to conditions governing product categories, geographic markets or even individual “SKUs,” the bar codes that designate specific items. In its most recent fiscal year, the company, which traces its heritage to 1837, reported $14.7 billion in profits on more than $76 billion in revenue.

The company often marries price increases with innovation, aiming for what it bills as “irresistible superiority.” The idea is to give consumers a reason beyond force of habit to buy what P&G is selling. Self-contained laundry detergent capsules known as Tide pods, which bundle convenience with a high price, are an example.

Likewise, in the Pantene line of hair-care products, P&G offers something called a “hydration bomb”: a single-dose hair treatment designed to provide 48 hours of improved look and feel. The improved version of Dawn dish soap is a degreasing formula called “Powerwash,” advertised as being five times faster than conventional liquids.

Price increases — at least initially — will not produce enough new revenue to offset all of P&G’s higher costs, let alone swell profits, Schulten said. Operating margin in the final three months of 2021 was 24.66 percent, essentially unchanged from 24.57 percent during the same period in 2019.

“They’re pricing to protect profits, not to increase profits,” Lauren Lieberman, consumer products analyst for Barclays, said.

P&G’s response to cost pressures was closely tracked by shareholders. David Bahnsen, an investment manager in Newport Beach, Calif., has almost $100 million of client money invested in the company’s stock and calls it “one of the most well-run companies in American history.”

The consumer products company has delivered 14 consecutive quarters of rising sales while seeing its overall market share expand. Yet P&G’s shares over the past 10 years have lagged behind the broader stock market, gaining little more than half of the S&P 500 index’s return. Inaction in the face of rising costs would have irked investors.

Bahnsen dismissed the idea that consumers are hurt by the company’s shareholder focus. Customers stick with the consumer products giant out of “brand loyalty,” he said. If P&G increases prices unreasonably, it risks driving its customers into the arms of brand-name competitors or less expensive private-label store brands.

“They can’t raise prices if the consumer isn’t willing to pay it,” Bahnsen said. “P&G has competition. They are regulated by the market.”

Russia's Ukraine invasion could be a global economic 'game changer'

Not nearly enough, liberals say. Even as P&G raised prices, it increased CEO Jon R. Moeller’s annual compensation to nearly $24 million and returned $19 billion to shareholders in dividends and stock repurchases in one year.

In early March, Mabud told the House Financial Services Committee that P&G had a “chokehold” on the diaper market. P&G and Kimberly-Clark, maker of Huggies, account for 70 percent of diaper sales, according to Groundwork.

To Mabud, consumers’ purchases of costlier P&G products reflect desperation, not devotion.

“It produces a lot of goods that people depend on,” she said. “If you need to put a diaper on your baby, you need to put a diaper on your baby.”

But a limited number of players is not the same as a lack of competition, according to Jeffrey Meli, head of research for Barclays. Diapers, he said, represent “a cutthroat market that is still contested.”

One reason is that P&G offers products at different price points. Its Luvs brand diapers, for example, are less expensive than Pampers and also often sell for less than private-label alternatives, according to Barclays.

Even so, inflation “may provide ‘air cover’ for companies to wield market power more like traditional monopolists, raising consumer prices and intensifying inflationary pressures,” Meli wrote last year.

It’s too soon to conclude that already is occurring, he wrote. Companies are still trying to catch up with the burst of higher costs that accompanied the end of the pandemic recession.

“The surge of inflation caught everybody flat-footed,” he said in an interview. “Companies move slowly with regard to pricing.”