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The general "price increases are because of inflation" is trivially disproven: if a company's profit ratio increases after price increases, the price increases

by olliej 3y ago

The general "price increases are because of inflation" is trivially disproven: if a company's profit ratio increases after price increases, the price increases are not due to inflation. That politicians get to stand up and say such trivially falsifiable BS without being called out is demonstrative of how much they are owned by businesses.

ycombinatornews 3y ago
In this theory, are salaries part of the profit or not? Cause they are not in the accounting scheme of things
- danaris 3y ago
  I mean, that's part of the absurdity of this all—if the companies raised exec salaries enough to erase the extra profit, it would be much harder to draw a clear line to this phenomenon. But they can't be satisfied with that. They need the stock price to rise, so they need to be able to show record profits. So they boast loudly of their record profits to their investors, while crying crocodile tears to the media about how terrible the supply line problems are, and how the government has handed so much money to the American people in the COVID stimulus (see, $2000/household 3 years ago can totally raise prices across the board for years on end), so these must be the source of all the price increases, don't you see?
  - NoMoreNicksLeft 3y ago
    I was under the impression that except for a few truly extraordinary industrial sectors (or even just one or two companies within them), profit margins are razor thin. So if their normal 2.1% profit margin goes up to 2.104%, isn't that "record profits"? It's not a very interesting story, and won't much rouse the rabble on reddit. I'm not sure that they have to be able to show "record profits" so much as they just have to spin it that way.
thegrim33 3y ago
I agree with you 100%, although the issue with your statement is that you mentioned profit ratio, which is the correct metric to look at, whereas 99% of the articles on this topic only look at raw profit numbers, not profit ratio. Article upon article upon article is posted with the same headlines about "company X had record profit numbers this year", but none of these articles ever look at profit ratio. By definition, in times of inflation, even if a company maintains the same exact profit ratio, their raw profit numbers will increase.
- octobus2021 3y ago
  The only way profit would increase without increasing profit margins is if the volume increased. While I don't have the data I think it would be safe to say that volume did not increase but actually went down due to all craziness in 2020/2021, so it makes sense to assume that the profit margins went up. Which can be easily seen in corporate reports where they report not only on net profit but on profit margins as well.
bryanlarsen 3y ago
Also trivially proven. " Corporate profit growth accounted for nearly 60% of inflation" https://www.npr.org/2023/05/19/1177180972/economists-are-reconsidering-how-much-corporate-profits-drive-inflation https://www.npr.org/2023/05/19/1177180972/economists-are-rec... (edit: fixed link)
- tedunangst 3y ago
  How do they calculate those numbers? I buy materials for $100 and sell them for $120 for 20% profit. My costs rise to $110 so I raise the price to $135. Consumers see inflation of 12.5%. What percentage of that is corporate profit and how much is whatever else inflation is?
  - bb88 3y ago
    Isn't that trivially calculable? Your profit was $20 before, now $25 after. So you got a 25% increase in income (!) for a 10% increase in expenses. The consumer saw a 12.5% increase in price. And that's what is being reported on corporate earning calls.
  - bryanlarsen 3y ago
    Their source is the Kansas City Fed, so the methodology could be tracked down that way. https://www.npr.org/2023/05/19/1177180972/economists-are-reconsidering-how-much-corporate-profits-drive-inflation https://www.npr.org/2023/05/19/1177180972/economists-are-rec...
  - creeble 3y ago
    If you're a public company, your quarterly profit report tells all.
- makomk 3y ago
  The fact that money is ending up as corporate profits does not actually prove that corporate profits are causing inflation. For example, consider natural gas: it's now vital to producing all kinds of things, from fertilisers and electricity to consumer goods. Supply of it was already tight coming out of the pandemic as factories tried to catch up on missed production and consumers spent the money they'd saved up from furlough, boosted unemployment, etc - then Russia choked off their exports and invaded Ukraine and there wasn't enough. This directly choked off the amount of stuff that consumers could purchase, causing inflation as more money chased less goods and services. That money ended up as profits at gas producers; their costs hadn't changed, but the market price of their product increased until demand dropped down to meet the available supplies. However, this doesn't mean that inflation could be avoided if we could only stop the greedy gas companies from profiteering and force them to charge less. They cannot supply the amount the global economy would consume if everyone's wages were worth as much and they could buy as much with them as before, which means any lower prices would be fake: there'd be people and businesses who'd want to buy at those prices but couldn't despite having the money, much like how the Soviet Union or Venezuela ended up with empty shelves. For the same reason, wage increases to try and bring people's spending power back to what it was cause further inflation - this is why central banks are worried about a wage-price spiral but the idea of a profit-price spiral is just populist nonsense.

by olliej 3y ago

ycombinatornews 3y ago

In this theory, are salaries part of the profit or not? Cause they are not in the accounting scheme of things

danaris 3y ago
I mean, that's part of the absurdity of this all—if the companies raised exec salaries enough to erase the extra profit, it would be much harder to draw a clear line to this phenomenon. But they can't be satisfied with that. They need the stock price to rise, so they need to be able to show record profits. So they boast loudly of their record profits to their investors, while crying crocodile tears to the media about how terrible the supply line problems are, and how the government has handed so much money to the American people in the COVID stimulus (see, $2000/household 3 years ago can totally raise prices across the board for years on end), so these must be the source of all the price increases, don't you see?
- NoMoreNicksLeft 3y ago
  I was under the impression that except for a few truly extraordinary industrial sectors (or even just one or two companies within them), profit margins are razor thin. So if their normal 2.1% profit margin goes up to 2.104%, isn't that "record profits"? It's not a very interesting story, and won't much rouse the rabble on reddit. I'm not sure that they have to be able to show "record profits" so much as they just have to spin it that way.

thegrim33 3y ago

I agree with you 100%, although the issue with your statement is that you mentioned profit ratio, which is the correct metric to look at, whereas 99% of the articles on this topic only look at raw profit numbers, not profit ratio. Article upon article upon article is posted with the same headlines about "company X had record profit numbers this year", but none of these articles ever look at profit ratio. By definition, in times of inflation, even if a company maintains the same exact profit ratio, their raw profit numbers will increase.

octobus2021 3y ago
The only way profit would increase without increasing profit margins is if the volume increased. While I don't have the data I think it would be safe to say that volume did not increase but actually went down due to all craziness in 2020/2021, so it makes sense to assume that the profit margins went up. Which can be easily seen in corporate reports where they report not only on net profit but on profit margins as well.

bryanlarsen 3y ago

Also trivially proven. " Corporate profit growth accounted for nearly 60% of inflation" https://www.npr.org/2023/05/19/1177180972/economists-are-reconsidering-how-much-corporate-profits-drive-inflation https://www.npr.org/2023/05/19/1177180972/economists-are-rec... (edit: fixed link)

tedunangst 3y ago
How do they calculate those numbers? I buy materials for $100 and sell them for $120 for 20% profit. My costs rise to $110 so I raise the price to $135. Consumers see inflation of 12.5%. What percentage of that is corporate profit and how much is whatever else inflation is?
- bb88 3y ago
  Isn't that trivially calculable? Your profit was $20 before, now $25 after. So you got a 25% increase in income (!) for a 10% increase in expenses. The consumer saw a 12.5% increase in price. And that's what is being reported on corporate earning calls.
- bryanlarsen 3y ago
  Their source is the Kansas City Fed, so the methodology could be tracked down that way. https://www.npr.org/2023/05/19/1177180972/economists-are-reconsidering-how-much-corporate-profits-drive-inflation https://www.npr.org/2023/05/19/1177180972/economists-are-rec...
- creeble 3y ago
  If you're a public company, your quarterly profit report tells all.
makomk 3y ago
The fact that money is ending up as corporate profits does not actually prove that corporate profits are causing inflation. For example, consider natural gas: it's now vital to producing all kinds of things, from fertilisers and electricity to consumer goods. Supply of it was already tight coming out of the pandemic as factories tried to catch up on missed production and consumers spent the money they'd saved up from furlough, boosted unemployment, etc - then Russia choked off their exports and invaded Ukraine and there wasn't enough. This directly choked off the amount of stuff that consumers could purchase, causing inflation as more money chased less goods and services. That money ended up as profits at gas producers; their costs hadn't changed, but the market price of their product increased until demand dropped down to meet the available supplies. However, this doesn't mean that inflation could be avoided if we could only stop the greedy gas companies from profiteering and force them to charge less. They cannot supply the amount the global economy would consume if everyone's wages were worth as much and they could buy as much with them as before, which means any lower prices would be fake: there'd be people and businesses who'd want to buy at those prices but couldn't despite having the money, much like how the Soviet Union or Venezuela ended up with empty shelves. For the same reason, wage increases to try and bring people's spending power back to what it was cause further inflation - this is why central banks are worried about a wage-price spiral but the idea of a profit-price spiral is just populist nonsense.