Is Inflation Caused by All the Corporations Just Raising Their Prices at Once?
Is Inflation Caused by All the Corporations Just Raising Their Prices at Once?
No, gas companies aren't causing inflation by raising their prices
You might look at the title and think, “Wow, is there actually anyone stupid enough to believe that?” Well, the answer to that question is definitely, “yes.” It doesn’t help that there are always left-wing politicians and activists pushing that whole nonsensical idea even though they almost certainly know it’s not true:
If you can sell people on this, not only does it shift the blame from the real primary causes of inflation (the Fed printing more money and government spending), it allows liberals to gain new powers. Next thing you know, there are windfall profits taxes, and price controls on tap designed to get those awful corporations under control.
So, why can this not be true?
Well, to begin with, businesses ALWAYS want to charge as much as possible for their products and services. If I could get people to buy the throw pillows on my couch for a billion dollars each, I’d happily put them on the market for that. Unfortunately, that’s not how things work. To explain, let’s create a theoretical town in the middle of nowhere, 1,000 miles away from everyone else.
There is a mining company there that everyone works for, and the only other business in the town is a grocery store. As a monopoly, the grocery store decides to take full advantage of the situation. They charge so much money that the miners have to pay 80% of their salaries just to buy food every week. None of the workers like this very much, but you gotta eat, right?
Still, they look for alternatives. Some of the ones that really know plants start foraging in the woods for food. Others hunt and fish. Some other people get hold of seeds somehow and start growing their own local garden. No one knows where he got them, but one of the miners even got his hands on some chickens and pigs and starts to farm.
Initially, people just feed themselves, but if they have any food left over, they sell it at a premium that’s still cheaper than the local grocery store. People buy that food to save money.
Then, someone gets an idea. They call their cousin who lives a thousand miles away, have him fill up his truck with cheap food from his area, and drive all the way out to their town. They’re able to sell all that food 10% cheaper than the ultra-expensive grocery store. After doing that a few times, they rent an even bigger truck to increase their profits. Soon, they’re making so much money that they ask, “Why don’t we set up our own grocery store? We’ll charge people 70% of their salaries for their food and all of them will still go to us because it’s cheaper than the other grocery store. That means we’ll make a killing!” Suddenly, everyone is shopping at the new grocery store in town because it’s slightly cheaper and the ultra-expensive grocery store realizes that unless they cut their prices, they’re not going to be able to compete.
Soon, a third and a fourth grocery store open up and there’s a cutthroat competition for customers. Each has different tactics to bring in more customers. Some focus on customer service. Others focus on having a great deli section. Another works on having unusual items that are hard to find at the other stores. However, price is still a key component at every store. If the prices are too high, none of the other stuff matters. Eventually, prices become very reasonable.
What you’ve read is a very simplified version of how things work in the real world, except in the real world, products are also competing with different classes of products. Netflix isn’t just competing with Hulu and Amazon Prime, it’s competing with PlayStation, AMC, the local dance club, and fifty other things people can potentially do with their leisure time.
If it gets too expensive to heat your house, you may buy more blankets, sleep in a coat, buy a wood-burning stove, or go stay with your cousin in a warmer climate this winter. That puts even more pressure on businesses to keep their prices low. Because not only do they have direct competitors that want their business, there are always alternate things people can do with their money. As long as there are no monopolies, cartels, or government edicts forcing you to buy products you don’t want, the market itself will keep prices down. That’s because when businesses compete, price is almost always one of the key factors people use to determine where their business is going.
The counter to this is usually, “Look at the profits these corporations are making! They’re so high.” Of course, businesses are always trying to make a profit. It’s why they exist. However, since this is the main thing the Left likes to point out and the oil industry is the place they like to point at most often, let’s dig into that industry a little more.
Gas prices were $2.39 cents per gallon when Joe Biden took office. Today, the average price per gallon is $3.87 cents per gallon. That’s an increase of $1.48 per gallon. Is that caused by inflation or oil companies taking huge profits?
Well, first of all, it’s worth noting that the sheer scale of these businesses makes their profit numbers sound much more impressive than they are when you dig into all the numbers. Here’s an old 2008 quote from then Exxon CEO Rex Tillerson that helps get that point across very nicely:
"I saw someone characterize our profits the other day in terms of $1,400 in profit per second. Well, they also need to understand we paid $4,000 a second in taxes, and we spent $15,000 a second in cost," Tillerson told ABC News' Charles Gibson. "We spend $1 billion a day just running our business. So, this is a business where large numbers are just characteristic of it."
Oil companies are actually NOT one of the more profitable businesses percentagewise:
Only thing is, U.S. energy companies have been among the least profitable firms during the last 10 years, and they’re not the most profitable now, even with oil prices up 60% during the last 12 months, to nearly $100 per barrel.
In 2021, U.S. energy firms were the 10th most profitable sector of the U.S. economy out of 11, according to S&P Global IQ. Energy firms listed in the S&P 500 stock index posted an 8.3% profit margin in 2021. That was below the median for all 11 sectors, which was 10.6%. Financials led with a 25.3% profit margin. Tech was second at 23.2%. Pharmaceutical firms posted a 23.1% margin. The only segment worse than energy was consumer staples, with a 6.6% margin.
...It's true that energy companies have been profitable recently. But that follows several disastrous years that drove many energy firms out of business and left others bleeding cash. Exxon, for instance, notched a profit of $23.6 billion last year. But that followed a gargantuan loss of $22.4 billion in 2020, a year when oil prices crashed so hard they briefly turned negative. Apple, by comparison, earned $94.7 billion in 2021, more than three times Exxon’s profit—and that came after an unbroken string of 11-figure profits going all the way back to 2010.
…Calls for punishing one industry for a short spurt of profitability begin to look inherently ridiculous when the industry is a dog over a longer period of time.
There is debate about how much the oil companies actually make in profit per gallon of gas sold, but most estimates put it at about 7 cents per gallon. Meanwhile, here’s what the government is taking in taxes per gallon.
As you can see, you are paying far more in taxes per gallon of gas than the oil companies are making in profit. They’re not causing inflation. On the contrary, it’s our government spending and printing money that’s behind it (if you want more details, here’s an explainer). If you need even more evidence, just consider that Big Oil is the most prominent industry that’s targeted with this nonsense, but prices are going up almost across the board on everything:
Energy prices surged 7.5% on the month and were up 41.6% on a 12-month basis. The food index increased 1%, while shelter costs, which make up about one-third of the CPI rose 0.6% for the month and were up 5.6% annually. This was the sixth straight month that food at home rose at least 1%.
Rental costs rose 0.8% in June, the largest monthly increase since April 1986, according to the BLS.
...Much of the inflation rise came from gasoline prices, which increased 11.2% on the month and just shy of 60% for the 12-month period. Electricity costs rose 1.7% and 13.7%, respectively. New and used vehicle prices posted respective monthly gains of 0.7% and 1.6%.
Medical-care costs climbed 0.7% on the month, propelled by a 1.9% increase in dental services, the largest monthly rise ever recorded for that sector in data that goes back to 1995.
Airline fares were one of the few areas seeing a decline, falling 1.8% in June though still up 34.1% from a year ago. The meat, poultry, fish, and eggs category also dropped 0.4% for the month but is up 11.7% on an annual basis.
Is the idea supposed to be that businesses across all these different sectors just spontaneously decided to raise their prices to make more profits and therefore, the government is blameless? How does that make sense to anyone?
The only way something like that could seem plausible to anyone is if they have such a lack of understanding of economics, business, and common sense that all of it seems like magic to them *** OR *** alternately, there are those who know the truth, but are trying to con the ignorant people that don’t. There simply are no smart, well-meaning people who understand economics and believe inflation is driven by companies all just deciding to raise their profits. So, when you hear someone claim that, ask yourself if they’re dumb or just playing to dumb people because it has to be one or the other.
John, people don't want to think logically all the time. That's hard work. What they want is someone in authority to tell them things they'd like to believe were true. Then they can say, I agree with X. Our politicians and pundits know this all too well. Public discourse inevitably devolves to sound bites that support wishful thinking.
When you have a group of voters who can only regurgitate bumper sticker slogans and not engage in analytical thinking, simple minded ignorance and misdirected blaming is inevitable. Since Democrats derive their political power from these people, the feedback loop created will never be willingly interrupted by them. Let's hope for our nation's sake that many of these destructive people are thrown out of office in next month's elections!