Monopoly Super Profits Fuelling Record Inflation

M Aseem

(March 2022): Inflation continues to be at a very high level throughout the world for more than a year now. In US and most other developed capitalist countries, it has persisted at the highest levels seen since the 1980s. Bourgeois economic experts have been blaming increases in production costs and shortages created by obstructions in global supply chain for this. Russia-Ukraine war has replaced this as the chief reason for high inflation for the last one month. According to these experts, corporations have tried their utmost to absorb the increased costs but have been compelled to pass through the effect to final consumers to protect their own profit margins. Reserve bank of India also argued in the latest Monetary Policy statement that most companies have been restrained while passing the effect of cost hikes to consumers, which has acted as brakes to slow the speed of price rises.

Another reason put forward to support the above argument is the Indian case of the difference between the Wholesale Price Index (WPI) which has remained in double digits for nearly a year now (13.11% in February 2022) and the Consumer Price Index (CPI) which was 6.07% in February. The contention is that this wide difference between WPI and CPI shows that the capitalists are unable to pass on the full effect of cost increases into retail consumer prices as the aggregate demand is under pressure. However, the two indexes aren’t exactly comparable since the basket of commodities each one tracks is widely different – WPI tracks a basket of 697 commodities consisting of chiefly manufactured goods whereas the local food and other products sold in neighbouring markets continue to have quite a sizable weight in the CPI. CPI also tracks some commodities like VCRs, Cassettes, Nokia phones, etc which are in fact no longer traded. Hence, to argue that capitalists are not able to pass on the increase in costs to consumers based on the difference between the two indexes is not based on facts. We rather find that most of the fast-moving consumer goods companies selling essential commodities of daily use have raised prices repeatedly and at a higher rate than the rate of inflation derived from both the indexes.

Another aspect worth mentioning is that these indexes in fact do not reflect the full impact of inflation. To illustrate our point, let us take the example of Centre for Monitoring Indian Economy (CMIE) analysis of December 21 quarter sales data. According to it the nominal sales of non-finance companies rose by 30.9% in the quarter. However, when effect of higher prices is removed the real net sales on constant prices increased by only 7.1%, which is in line with long term trend of sales. The higher increase in sales is the effect of higher prices. This was especially seen in the case of metals, cement, paints, etc. This increase in prices has benefited these companies and their profit margins have improved.

High Food Prices – Financial Speculation

Russia-Ukraine war has definitely accelerated the pace of inflation. But the process was already on and the underlying reasons for rise in prices were already present before the war. Economist Jayati Ghosh describing food inflation as worrisome wrote months before this war, “At the end of 2021, the United Nations Food and Agriculture Organization’s (FAO) food price index was at its highest level in a decade and close to its previous peak of June 2011, when many were warning of a global food crisis. Moreover, last year’s increase was sudden: from 2015 to 2020, food prices had been relatively low and stable, but soared by an average of 28% in 2021. Much of this surge was driven by cereals, with maize and wheat prices increasing by 44% and 31%, respectively. But prices of other food items also shot up: prices for vegetable oil hit a record high during the year, sugar was up by 38%, and price increases for meat and dairy products, though lower, were still in the double digits. Food-price inflation currently exceeds the increase in the overall price index, and is even more alarming given the significant decline in workers’ wage incomes during the COVID-19 pandemic – especially in low- and middle-income countries. This lethal combination of more expensive food and lower incomes is fueling catastrophic increases in hunger and malnutrition. There are many possible reasons for the spike in food prices. Some are systemic. Supply-chain problems – especially regarding transportation – have been a major factor driving price increases for a wide range of commodities. Thus, grain prices rose rapidly in 2021, despite record global output of nearly 2.8 billion tons.” 

Besides the systemic factors influencing supply, Jayati Ghosh considers stockpiling and financial speculation to be the main factors in food price inflation, “The other important factor is financial speculation in food markets, which has recently experienced a revival. Food commodities became an asset class after financial deregulation in the United States in the early 2000s, and there is significant evidence that this played a major role in the destabilizing food-price volatility of 2007-09. In recent years, these commodities had become less attractive to investors, but that changed during the pandemic. Despite high volatility, long positions in major food commodity markets were significant and positive for most of 2021, suggesting that financial investors were expecting prices to increase. The volume of such investments grew substantially last year, enabled by persistent regulatory loopholes and the availability of cheap credit to financial institutions. Unlike some of the more systemic forces affecting food supply and prices in the medium term, policymakers could easily address the issues of stockpiling and speculation. But that requires governments to accept that these are problems, and to muster the will to address them.”

Why Record Inflation – Increased Costs or Super Profits?

Whenever capitalists increase prices, the explanation given is that it is their compulsion since the cost of inputs has increased else their profit margin will be eroded. The correctness or otherwise of this explanation needs to be examined. First and foremost, we need to find whether there was any real pressure on the rate of profit of these companies because if these corporations were not able to pass on the full impact of cost hikes and were absorbing it to even a small extent, it must be evidenced in the decline or at least in the stagnation of the profits of at least some companies. Can we find any evidence of that? On the contrary, we have seen record increase in corporate profits despite slowdown in economic activities and immense crisis in lives and livelihood of the most working people during the Covid pandemic. The rate of profit of the corporates, which was on a downward path in the decade prior to pandemic, saw a reversal of trend and corporate profits rose fast in 2020 and 2021. We have already written on this trend in India in ‘The Truth’. Similar rise in corporate profits has also been witnessed in other capitalist countries where inflation has been moving upwards. This disproves prima facie the argument of unabsorbable high costs. Even the ‘actual’ increase in input costs is because of the manipulated price hikes of these inputs by the cartels formed by monopoly capitalists controlling the trade and transportation of these commodities. We’ll see some examples of these below. However, Indian telecom industry is a perfect example of the way these cartels operate. Three companies controlling almost the whole market (Jio, Airtel and Vi) have increased mobile call and data rates twice in tandem (once 20%) and are planning to do so a third time, in order to make telecom industry ‘more profitable’. That shows very well the relationship between the costs and price increases.

Just as an example of the extent of relationship of production ‘costs’ to prices charged by the corporate capitalists we give a chart below which compares the fees for some medical examinations between corporate hospitals and MGIMS Wardha run by a non-profit organisation.

Monopolies and High Prices

To understand the role of monopolies in price gouging for super profits let us take the example of Container Shipping Companies since this was the very industry from where the first rumours of late delivery of goods because of supply chain problems and delays in shipping, loading-unloading, queues at warehouses, shortage of truck drivers, etc began to float leading to an atmosphere of all round shortages and resulting price hikes. But, if this was true, it should have shown up as negative impact on their business results and profit-loss statements. However, news is that 7 major container shipping lines made bumper profits of 80 billion USD in first 9 months of 2021 which is 7 times compared to previous year and twice the total profits in the whole of previous decade (2010-2020). “This is an unprecedented level of profitability,” Alan Murphy, CEO of Sea-Intelligence, an analyst company wrote.  Fact is that a cartel of only 3 alliances of such companies dominates 80% of all container shipping and they were able to increase their container freight rates excessively and make super profits by creating this artificial scarcity. After a major hue and cry, even US president Joe Biden has been forced to concede that the shipping companies formed a cartel for price gouging. White House Press Secretary Jen Psaki on 8 July said that the President will instruct the Federal Maritime Commission (FMC) to wrangle “unjust and unreasonable” fees and work with the Justice Department to investigate and punish anticompetitive conduct. Similar situation has also been observed in US regarding the domestic railroad freight traffic. Biden administration has also been forced to accept existence of a similar cartelisation in meat packing industry. These companies have also made high raises in prices of packaged meat which is an important ingredient of American diet though prices of chicken, hogs, sheep, cattle, etc have remained comparatively stable.

Bourgeois political economy considers prices ‘discovered’ by free markets to be ‘natural prices’. However, Professor Isabella Weber of University of Massachusetts-Amherst wrote in Guardian on 29^th December 2021 that, “Inflation is near a 40-year high. Central banks around the world just promised to intervene. However, a critical factor that is driving up prices remains largely overlooked: an explosion in profits. In 2021, US non-financial profit margins have reached levels not seen since the aftermath of the second world war. This is no coincidence. The end of the war required a sudden restructuring of production which created bottlenecks similar to those caused by the pandemic. Then and now large corporations with market power have used supply problems as an opportunity to increase prices and scoop windfall profits. The Federal Reserve has taken a hawkish turn this month. But cutting monetary stimulus will not fix supply chains. What we need instead is a serious conversation about strategic price controls.”

There was a very sharp and bitter reaction to this article and Professor Weber was even termed an ‘unreal economist’ and a ‘leftist’ which is considered to be the worst insult among bourgeois economists and professors. That this bitter campaign of abuse was joined by renowned bourgeois intellectuals like Paul Krugman, a Nobel Laureate, shows how fatally dangerous revealing this truth to the masses is for their employers, i.e., capitalist class. All these learned economists consider it an incontrovertible and absolute truth that market prices discovered by free competition are the natural prices and no fetters of regulation or control must be put on the operations of such prices as that will hinder economic development and actually increase inflation. They theorise that these natural prices facilitate economic development as the bumper profits in such an industry attracts more capital which dampens prices by increasing supplies. However, in the age of monopoly capitalism this argument is a deliberate falsehood and deception since it is highly unprobeable in times of highly integrated national and global supply chains for a new competitor to enter and increase supply. It might only be possible in some exceptional niche industry with low level of concentration and complexity in production. It is not simply feasible in most industries with extraordinary level of complexity and concentration. We can see the two examples we discussed above – telecom and shipping. Is it possible for a new competitor to enter these areas because the profits are high? Fact is, compared to these ‘more loyal than the king himself’ bourgeois professors, the monopoly financial capitalists themselves are more honest. The ‘investment theory’ of Warren Buffett, one of the largest financial capitalists in the world, is centred around the concept of moats, i.e., obstructions in the way of new competitors. He advocates investing in only those companies which can create widest and deepest moats around their business, that is, make it almost unsurmountable for the new competitors to enter the arena, since these are the industries which can generate highest level of profits.   

Monopoly Capital Controls Both Market & Politics

Moreover, in the age of monopoly capitalism, it is not only economic reasons which prevent fall in prices through free competition. In addition to these economic reasons, the Monopoly Capitalists also control the state machinery, politics, laws & regulations, courts, bureaucracy, police, etc to such an extent that they are not only able to frame laws and get court orders at will but can also make use of police and criminals to further their own business interests. A cursory look on the history of Indian telecom in last 7-8 years is sufficient to understand how state power is used by monopoly capitalists to manage competition in industry. And this use of state power is not only limited to big industries like telecom, retail, IT, e-commerce, weapons, etc. For example, the current BJP government in India has transformed the meat industry by forcibly closing most small slaughterhouses and butchers using state machinery as well as parallel state of fascist stormtroopers and criminal gangs to enable full control on domestic as well as export meat market by few monopoly capitalists. The use of state machinery and illegal parallel fascist power by Ambanis, Adanis, Tatas, Agrawal (Vedanta), Ramdev, etc is so well known now that we don’t really see the need to give any more examples for that.

It is pertinent to mention here that similar arguments were advanced in India when Modi government brought in new farm laws to accelerate the process of handing over Indian agricultural sector as well as all trade in agricultural commodities to few monopoly corporate capitalist houses by removing limits on stockpiling of these commodities. It was argued by bourgeois experts and economists that the grain and other food commodities prices will come down when trading in these is taken over by corporate capitalists from the rich farmers and small traders who extract rent from whole society through minimum support price (MSP) for food grains and some other crops. While we have earlier written in The Truth about the role of Adanis and other monopoly capitalists in skyrocketing prices of mustard/rapeseed and other edible oils’, some ‘learned’ people keep on saying that it is so because Indian capitalism is a distorted crony capitalism and not of some pure, competitive and rule-based variety wherein this wouldn’t have been happened. Hence, we find it necessary to give below some examples from recent inflationary spiral in US, the ‘mecca of free capitalism’, to show the results of control of corporate monopoly capital on the trade in essential commodities and how much it benefits common people!

Let us start with a report of Workers Today. ‘If you’ve been slammed lately by higher prices on everything from groceries to rental cars and gas prices, you’re probably wondering what on earth is behind these skyrocketing costs. Corporations are quick to blame this new reality on the pandemic or the war in Ukraine, but another major culprit is hiding in plain sight: their own profiteering. Four times a year, corporations are required by law to update their investors on how they’re doing in terms of sales and profits. These are called “earnings reports,” and the companies will usually hold calls with the investors to walk them through the latest report. My organization, Groundwork Collaborative, recently got our hands on the transcripts from hundreds of these earnings calls. And you won’t believe what CEOs are boasting about. Knowing that the current inflation frenzy is a convenient scapegoat, these companies are charging customers even more to pad their profit margins. They aren’t just admitting it—they’re openly bragging to investors about how well it’s working.

“I think we’ve done a great job with our pricing,” boasted the CFO of Hormel, a maker of popular grocery brands. “I think it’s been very effective.” As prices went up, the company improved its operating income by 19% in the first quarter of 2022 compared to 2021. Constellation Brands, the parent company of popular beers Modelo and Corona, is also engaging in bald-faced profiteering. On its January call, Constellation’s CFO admitted that its consumer base “skews a bit more Hispanic” and the company wants to “take as much as [we] can” from them.

And now, the conflict in Ukraine is providing yet another opportunity for oil and gas companies to pad their bottom lines. “It’s tragic what’s going on in Eastern Europe,” said one oil executive in late February. “But if anything, these high prices, the volatility, drive even more energy security and long-term contracting.”

This pandemic profiteering is taking a massive toll on consumers, workers, and small businesses. Low-income Americans are pinching pennies to feed their families and pay their bills. And while mega-companies can use their market power to raise prices and generate record profits, small businesses and independent retailers are struggling to keep their doors open. The appalling price gouging and monopolistic behaviour we’re monitoring come on top of decades of disinvestment in our workers and supply chain, excessive corporate power, and financial markets maximizing short-term profits. This broken system left us wholly unprepared to accommodate increases in demand.

But make no mistake: Next time you experience sticker shock in the checkout line, it’s a safe bet that corporate executives and shareholders are reaping the rewards. People are catching on: A new poll from Data for Progress and Groundwork finds that 63% of voters believe that “large corporations are taking advantage of the pandemic to raise prices unfairly on consumers and increase profits.”’

And because the people are catching on to this profiteering, government and regulators are also being forced to take notice and seen to be doing something. Office of the New York Attorney General will seek to apply the state’s price-gouging law to opportunistic price increases that use high inflation as an excuse. Attorney General Letitia James has announced that ‘her office will write new rules under the state’s General Business Law aimed at preventing opportunistic price-gouging during a time of high inflation. The effort builds on a growing body of evidence from corporate earnings calls that companies are using inflation as an excuse to raise prices well above input cost increases caused by supply chain disruptions. The announcement highlights these opportunistic price increases for beef, diapers, toothpaste, coffee, and other staples, as well as soaring profits from global ocean shipping and energy companies. “Throughout the pandemic, hardworking New Yorkers have been struggling to make ends meet, but big corporations have been celebrating record breaking profits,” James said in a statement. “It doesn’t add up. My office is prepared to use every tool in our toolbox to crack down on price gouging and pandemic profiteering.”

However there’s been a raging debate at the federal level over how much corporate price-gouging is contributing to the increase in the cost of basic goods. The White House has stepped out in a couple of instances to chide meatpacking oligopolies for raising grocery prices while prices for cattle and hogs and chickens remained stagnant. The Justice Department is also inquiring into chicken companies sharing information on worker wages to hold down labor costs. In the State of the Union address, President Biden announced a new effort to crack down on the record profits of the ocean shipping cartel.

But others within the administration haven’t bought into the message, neutering the White House response. This, despite numerous instances on corporate earnings calls where CEOs boast about their “pricing power,” meaning the ability to raise prices without losing customers. Reporting from The Wall Street Journal identified 100 large publicly traded companies that enjoyed profit margins that were at least 50 percent higher than 2019 levels. Federal economic data also shows a significant spike in corporate profits in 2020.

The notice of proposed rulemaking notes that New Yorkers saw price increases in 2021 of 39.6 percent for gasoline; 41.6 percent for used cars and 18.4 percent for new cars; 16 percent for meats, poultry, fish, and eggs; and 21.4 percent for household energy. The rulemaking would set up the standards by which some or all of these price increases would constitute price-gouging during a time of disruption. Similar to the White House emphasis, the notice cites the beef and ocean shipping industries specifically and at length. Supermarkets, fast food, auto dealers, oil and gas, and lumber are also referenced.

The notice points out that concentrated industries have more wherewithal to raise prices while using inflation as an excuse, because consumers have no alternative options for what in many cases may be necessary goods. The rulemaking is the first at the state level to tackle potential corporate price-gouging. Polling shows that a majority of the public holds corporations responsible for profiteering.’ All these examples make it clear that the argument of cost increases is being used as an excuse to increase prices for the end consumers in the current period of high inflation. However, most important thing to note is that fundamentally, in the capitalist system, cost is nothing, but value added by human labour in the production process. After the first addition of this value to the primary goods extracted from nature, every next stage of the production process producing many different products this value keeps on getting added. At every stage of production, a part of this value is paid to workers as wages for their labour power and the rest goes to the capitalists as surplus value or profit. Together these two form the ‘cost’ addition for next level of production or consumption. Hence, all ‘cost’ increase is combination of wages and profits. But we find that in past years unemployment has been quite high and, as a result, real wages have been stagnant or even declined with few exceptional cases of little increase in some sectors. However, the profits have seen explosive increases during the pandemic. That implies that it is high level of profiteering by monopoly firms which has given rise to this record inflation. Monopoly capital is able to extract these high prices since they have immense pricing power derived from their control on the whole supply chains of production and distribution which they can manipulate to create artificial shortages and people have no alternative but to buy from them.