"Price Hikes Amid This Gap" Companies Increasing Profits by Taking Advantage of Inflation Opportunities

Behind the persistent inflation in major countries, including the United States, there is criticism that corporate greed exists as companies seize the opportunity to raise product prices and increase profitability.

The Wall Street Journal (WSJ) reported on the 2nd (local time) in an article titled "Why is inflation so sticky? It could be because of corporate profits" that a considerable number of companies are taking advantage of the worst inflation situation to raise prices at a rate higher than the increase in costs.

Typically, factors influencing a company's product prices include costs and competition with other products. Considering this, supply chain disruptions after the COVID-19 pandemic and the rise in energy, food, and raw material prices due to Russia's invasion of Ukraine provided sufficient reasons for most companies to raise product prices recently.

However, despite the sharp interest rate hikes continuing since last year, the consumer price inflation rate in April remains uncomfortably high in major countries including the U.S., according to WSJ's analysis. The consumer price index (CPI) for the Eurozone released that day rose 7.0% compared to the same month last year. This is not only a slight increase from the previous month but also far exceeds the European Central Bank (ECB)'s price stability target.

WSJ pointed out that behind such uncomfortably high inflation, there are signs that companies are raising product prices beyond merely offsetting cost increases. ECB economists evaluated that "companies are increasing profits," and this factor played a bigger role in fueling inflation in the second half of last year than wage increases.

[Image source=Reuters Yonhap News]

Recent earnings reports also confirmed that companies' profitability improved through product price increases. Holcim's CEO, Jan Philipp Jennis, a building materials manufacturer, stated during the earnings announcement, "We have been in an inflationary environment for nearly two years," and "As a result of very proactive pricing, margins have actually improved."

PepsiCo, which raised product prices by more than 13%, and Kimberly-Clark, which implemented price increases for two consecutive quarters, posted strong first-quarter results. McDonald's saw a 63% surge in net profit as even more customers visited its stores. Nestl? SA, well known for Nescaf? and KitKat, saw a 5.6% increase in first-quarter sales following a 9.8% price hike. Nestl? previously stated that it only raised product prices to offset cost increases over the past two years.

Paul Donovan, Chief Economist at UBS Global Wealth Management, analyzed, "Companies believe consumers are willing to follow price increases because they are aware of supply chain bottlenecks and rising energy prices," and "They are confident that (price increases) are not their fault and will not damage their brand."

Moreover, recent price increases due to supply chain disruptions are an industry-wide issue rather than specific to certain companies. As a result, the competitive landscape considered during initial pricing decisions has become less relevant. Isabella Weber, a professor of economics at the University of Massachusetts, said, "At this point, we need to view corporate pricing structures from a completely different perspective," adding, "There is an implicit agreement that if companies raise prices due to bottlenecks, competitors will follow suit." She also pointed out that this pattern has been confirmed in recent U.S. corporate earnings reports regarding profit generation.

WSJ's analysis also highlights that corporate greed aimed at maximizing profitability is fueling food price increases in regions such as Europe. Allianz analyzed that about 10% of these price increases reflect companies' desire for higher margins and that this was possible because the core of the food supply chain is dominated by a few companies. Ludovic Subran, Chief Economist at Allianz, pointed out, "There is insufficient competition in the food sector, especially in distribution."

[Image source=Reuters Yonhap News]

However, there has also been backlash against these corporate actions. Germany's major retailer Edeka recently criticized corporate pricing policies and stopped selling products from some companies that raised prices excessively. Edeka CEO Markus Mosa urged, "The branded product industry must take responsibility and stop artificially causing inflation."

There are also concerns that the extent of price increases acceptable to consumers has reached its limit. In recent earnings reports, some CEOs noted that consumers are increasingly resisting price hikes. Nestl?'s Chief Financial Officer Fran?ois-Xavier Roger also said, "We will see prices come down." Chief Economist Donovan evaluated, "The consumer reputation for poor value for money may persist for a long time," suggesting that the era of profit-driven inflation may be coming to an end.

This content was produced with the assistance of AI translation services.