10.4% is the current level of inflation, which has been boosted by corporate profit-seeking
When Heinz originally introduced canned baked beans to the UK in 1886, they were sold for ninepence a can – around £3.57 in today’s money (we could go on about purchasing power for a while, but let’s not). Production increase lowered the cost of beans until, during the Baked Bean Wars of the 1990s, they were sold (as a loss leader) for 3p a can. With some cans increasing by 79% in a year, the standard 415g can of Heinz beans, at £1.40, is no longer synonymous with frugality.
Is this the outcome of inflation, which surged to 10.4% in February due to an 18% increase in food prices, or the cause of it?
Heinz claims that price increases (including a 60% hike in ketchup) are due to higher production costs. Nevertheless, Andrew Bailey, the governor of the Bank of England, appealed to businesses this morning on the Today programme: “to those who are establishing prices – please understand, if we get inflation entrenched, interest rates will have to go up further, and greater inflation actually benefits nobody.”
Bailey’s warning adds to the observations of other economists, including the European Central Bank, and businesses, including some supermarkets, who argue that many of the items in the basket of goods used to calculate inflation are rising in price not because of monetary policy or the war in Ukraine, but because the companies that produce them have seen an opportunity to increase profits.
These items’ producers aren’t feeling the squeeze. The ketchup juggernaut Heinz Kraft’s yearly outlook cautions against the impact of inflationary pressures, the crisis in Ukraine, and the possibility of a worldwide downturn, but it nevertheless anticipates earnings growth of 4 to 6% for 2022. The corporation produced $1.843 billion in profit for the three months ending September 30, 2022, according to its reports, which is less profit than it made in 2021, but with a gross margin of more than 30%, it is hardly a disaster.
Mars makes Dolmio sauces. Mars is a private company that doesn’t have to say as much about its finances, but last year it made more money than Coca-Cola and added billions to the estimated $160 billion fortune of the Mars family.
Although it is obvious that the costs of producing ketchup and pasta sauce have increased due to an increase in input costs (such as energy, shipping, ingredients, wages, and financing), Heinz Kraft and Mars have been criticised by other companies for increasing their prices in a manner that has been characterised as being excessively inflated. Tesco started openly bargaining with both firms about high costs throughout the course of the summer, assuring the press that “We will not pass on unreasonable price hikes.”
It was helpful for Tesco’s public relations, as the company advertises itself as doing everything it can to keep costs low for customers (at least if those customers have a Clubcard). But the retail giant is not a charity; it has a fiduciary duty to its shareholders, who have received a dividend yield of over 10% this year as a result of several years of increasing revenue from a shrinking number of employees. The company has a fiduciary duty to its shareholders, who have received a dividend yield of over 10% this year.
Companies, on the whole, are shielded from the effects of inflation by the market. David Spencer, a professor of economics at Leeds University, says that companies are able to cover greater expenses with higher prices. “Firms are able to cover higher costs with higher prices.” Although actual wages continue to decrease, this helps the company retain its profitability.
A significant economic event also provides companies with a narrative to tell customers about why they need to increase prices. The implementation of the euro is an excellent illustration of this: exchange rates were predetermined in advance, and economists anticipated little change in the behaviour of consumers; yet, for millions of company owners, it was a decision between rounding down or rounding up. In Germany, the currency became known as the Teuro, which is a pun on the word teuer, which means expensive. In 2002, the German finance minister, Hans Eichel, was forced to admit that restaurants and other businesses had “done rather well for themselves” as they switched menus as a result of the currency change.
Another epidemic of this kind was caused by the COVID-19 virus. Consumers who were under the impression that everyone was in it together tolerated poor customer service, delays, and closures for a while because they believed that everyone was in it together, although obviously some people were in it to a much greater degree than others. At first, it was an excuse for doing less. The issue evolved into an excuse to charge higher prices as a result of the disruption of supply chains and the increased demand for commodities, which released inflation at a rate that had not been witnessed for an entire generation.
The effects of this can now be seen in the many price increases that are occurring throughout the economy. According to a report published in April by the Competition and Markets Authority, “average markups have climbed since 2008 from little over 20 percent to over 35 percent.” A study conducted by the labour union Unite in June looked at the earnings reported by the companies included in the FTSE 350 index of the UK’s largest publicly traded companies (with the exception of investment trusts and energy companies), and they discovered that profits had increased by an average of 42% over the course of 2021.
According to AJ Bell, an investment services company, the FTSE 100 has already announced a record £50.3 billion in share buybacks and is expected to pay out £81.5 billion in dividends in 2022. Share buybacks and dividends, which benefit shareholders and prop up share prices, are another sign that companies are doing well and 2022 was a bumper year for both: the FTSE 100 has already announced a record £50.3 billion in share buybacks.
This is also reflected in the compensation of top executives, which is normally determined by remuneration committees based on the financial performance of the company. According to the research published by the High Pay Centre, the median FTSE 100 chief executive earned a salary increase of 39 percent in 2021, bringing their total earnings to £3.41 million.
Controversy surrounds the proposed steps to curb “profit-push” inflation, also known as “greed inflation” in certain circles. Price controls can be counterproductive since they have no effect on reducing demand; for example, this winter there will be plenty of affluent individuals who are able to keep their furnaces running at full blast because of state-imposed price controls on gas. It’s possible that the explanation lies in our tax code, which is considerably kinder to wealth that has been generated via corporation earnings (dividends and capital gains) than it is to income that has been earned through labour.
Should nothing be done to fix this issue, the current economic downturn may continue for a longer period of time and become much more severe. According to Spencer, “lower real wages will create a strain on demand and exacerbate a recession,” and he also predicts that there will be an increase in strike action as a reaction to profiteering by corporations. There are techniques of dealing with inflation that are more effective and equitable than others.