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Corporations: Crying all the way to the bank?

What will the Fed do to lower inflation

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Inflation may be eating into ordinary paychecks, but corporations and CEOs have been doing just fine, said Allison Morrow at CNN. Corporate leaders have been "quick to blame rising prices" on pandemic-related supply chain issues, or the war in Ukraine, or the federal rescue packages. Meanwhile, "they're making out like bandits." The median compensation for a CEO at an S&P 500 company hit a record $14.2 million in 2021, up 11.3 percent from the year before. By comparison, American workers' compensation grew 4 percent last year, which still puts them in the red when adjusted for the 8 percent growth in inflation. Meanwhile, overall corporate profit margins last year went up to 13 percent, said Matthew Boesler in Bloomberg, "a level reached in just one other three-month period during the past 70 years." No wonder Democrats have grown increasingly vocal about "opportunistic price hikes." The robust growth of so many bottom lines "tends to undermine the argument that soaring labor costs are what's driving the current surge in inflation."

The populist bashing of "greedy" firms is still misguided, said Catherine Rampell in The Washington Post. That doesn't mean that oil executives whose companies have raked in record profits "deserve sympathy" when Democrats chide them for not investing more. However, punitive proposals — such as a "windfall profits tax" — would end up chilling investment further and reducing output. That didn't work when it was tried in 1980, and it's "the opposite of what's needed to bring prices down today." The prevailing grievance against companies is that "they shouldn't be making money if consumers are hurting," said Noah Diekemper in The Hill. But it's crucial for the market to "allow prices to respond to increased demand." Otherwise, companies will have no incentive to meet demand "the next time a shortage drives up prices."

Corporate complaints of rising costs seem to ring hollow if you look back at the last year, said Justin Lahart in The Wall Street Journal, but the "earnings squeeze" they've been warning of may finally be here. Analysts still expect revenue growth, particularly for services and travel businesses. But profit margins are likely to come in much lower. Many businesses have been burdened with increases in commodity costs. And though labor costs have taken time to catch up, they're racing ahead now: Total payrolls for "private-sector employees were 11.1 percent higher in the first quarter than a year earlier."

From the Federal Reserve's perspective, the dampening of corporate profits is not a bad thing, said Lisa Abramowicz in Bloomberg. The Fed is not exactly "rooting against corporate America." But it wants to achieve "a soft landing" as it raises rates and tightens monetary policy. It does not want corporations to easily "pass on their rising costs to consumers and cause higher inflation expectations to become entrenched in the American psyche." So, the Fed will be watching earnings season closely. If corporations are still minting profits, the bank may feel it has to "tighten monetary policy more intensely and in ways that create greater risk of an economic downturn."

This article was first published in the latest issue of The Week magazine. If you want to read more like it, you can try six risk-free issues of the magazine here.

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