- Corporate markups and profits hit record highs in 2021, researchers at the Roosevelt Institute found.
- Companies on average charged about 72% more than their input costs.
- Reversing that surge is one way policymakers can help cool US inflation, the researchers said.
Several factors, from Russia's invasion of Ukraine to supply chain snags, are fueling today's sky-high inflation. Yet new research from the Roosevelt Institute finds that the buck stops at US companies, and that firms are charging Americans the most they ever have.
Inflation is closely tied to companies raising their prices, starting with an uptick in the costs that go into companies' operations, ranging from pricier materials for manufacturers to higher rents for retailers. Affected businesses then raise consumer prices to make up for those costlier inputs. Differences between prices and costs are known as markups, and in the pandemic-era economy, those gaps are wider than ever.
Both markups and profits among 3,698 US-operating firms soared last year to the highest levels since the 1950s, the Roosevelt Institute's Mike Konczal and Niko Lusiani said in a June brief. The average markup reached 1.72 in 2021, meaning the typical price companies offered to their customers was 72% higher than companies' costs. That's up from an average of 1.56 through the 2010s, or 56% above marginal cost.
Last year also touted the largest annual increase in markups since at least the 1950s, the period for which the duo ran their analysis. The uptick was more than 2.5 times larger than the next largest annual increases seen prior.
That transfer of higher costs has helped boost inflation to levels not seen in four decades. The Consumer Price Index — a closely watched measure of nationwide inflation — soared 8.6% in the year through May, surpassing economist forecasts and marking the fastest pace of price growth since 1981.
The measure was largely boosted by surging gas prices, but the report also showed inflationary pressures persisting in nearly all corners of the economy. With global supply chains still far from healed and gas prices swinging higher still in June, hopes for a cooldown are largely dashed.
The researchers' findings might be specific to the inflation seen throughout last year, but the lack of any slowdown in 2022 suggests there's an opportunity for relief, the team wrote.
"Markups being unusually and suddenly high means there is room for them to reverse with little economic harm and with likely societal benefit," Konczal and Lusiani said in the brief.
Konczal told Insider that inflation in 2022 looks different than last year, calling it "broader and it's a little bit more persistent than it was in 2021."
"That said, the large margins these corporations have are still there and they need to come down, or at least if they came down, if these profit margins shrink, that would help take pressure away from inflationary pressures," he added.
The Federal Reserve is the main body tasked with slowing inflation, but the researchers highlighted several options Congress could pursue if lawmakers wanted to fight price hikes at the corporate level. Antitrust "remedies" can better match supply and demand in more "targeted and nuanced ways," Konczal told Insider, naming prescription drug costs as an example.
Additionally, "higher markups do not necessarily have to translate to higher profits" like they did last year, the authors wrote. They suggested an excess profit tax could be a solution for "distributing runaway economic gains" while "eroding" pressure on companies to boost markups.
The situation may seem "grim" to policymakers, Konczal told Insider, but targeting industry concentration can counter soaring markups.
"How the corporate sector evolves in the next year or two — whether or not prices come down, especially for many goods — will determine a lot of the trajectory of the economy," Konczal said.
"If [policymakers] end up just hoping that the Federal Reserve solves this, it will likely lead to a bad outcome or a worse outcome than if other options were also put in play."