The Tell: The Fed has it wrong: Corporate greed is to blame for inflation, not rising wages, SocGen analyst says


Federal Reserve Chairman Jerome Powell has repeatedly said undercutting wage growth for American workers is essential for tamping down the worst bout of inflation in the U.S. in more than 40 years.

But a raft of data suggest that robust corporate profit margins — not wages — are having a much bigger impact on rising prices, according to longtime Société Générale strategist Albert Edwards.

Edwards calls this dynamic “greedflation”: the notion that corporate price gouging is helping to keep inflation robust at a time when commodity prices, which were initially blamed for the price shock, have actually fallen over the past 12 months.

West Texas Intermediate crude oil CL00, -2.34% was trading at roughly $77 a barrel on Thursday, compared with $115 a barrel one year ago, according to FactSet data. Prices of other important industrial commodities, including copper, have also declined during the same period.

In his latest note on the topic, shared with MarketWatch Thursday, Edwards questioned why the Fed has been so insistent on targeting wages instead of pointing the finger at corporations: “the primary driver of this inflation cycle is soaring profit margins. Rather than calling this out as the primary cause of high inflation, central banks have instead chosen to focus on rising nominal wages as threatening to embed higher inflation – the so called ‘wage/price spiral’.”

Often, corporations are raising prices of goods and services not because they need to due to rising labor and raw materials costs, but because they can get away with it by blaming inflation, something that consumers have been primed by media reports to expect, Edwards said.

Blaming wage growth for inflation seems particularly misguided considering that workers’ wages haven’t even kept pace with rising consumer prices, Edwards said.

Meanwhile, corporate profit margins have climbed to near-record highs. Profits for non-financial companies rose to nearly $2.1 trillion in the third quarter, a record high on a nominal basis, according to Commerce Department data. They have risen sharply since the onset of the COVID-19 pandemic in March 2020.


This isn’t the first time Edwards has explored this topic in his research shared with Societe Generale clients. He examined the issue of price gouging in a note published back in November. The chart below, which shows how corporate profits as a percentage of GDP have risen to record highs, is from that previous note.


While workers’ earnings have generally increased, they haven’t kept pace with rising consumer prices, which means that, when adjusted for inflation, workers’ earning power has actually declined.

Average hourly earnings increased by 4.6% year-over-year, according to the latest monthly jobs data released by the Department of Labor. That’s less than the headline year-over-year increase in the consumer-price index, which stood at 6%.

Moreover, Edwards showed that U.S. workers’ earnings compared to the costs of the goods and services they help to produce had been declining for years, tracing the start of the trend to when China joined the World Trade Organization in December 2001.


Using an example taken from Howard University economics professor William Spriggs, Edwards pointed out that if wages truly are the driving inflation, then the cost of food at restaurants should be rising faster than the cost of food consumed at home because of the cost of labor.

But the opposite is true, according to the consumer-price index, a closely watched gauge of inflation produced by the U.S. government.

The cost of food eaten at home has risen by 10.2% during the year through February, according to the latest CPI data from February. By comparison, the cost of food consumer away from home has increased by 8.4%.

“If wage inflation was pushing prices higher, food at home would exceed food away from home,” Edwards said.

Therefore, “wages are not the problem.”

This article was originally published by Read the original article here.

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