Profiting from inflation: Two new reports show companies are making billions by pushing prices higher

Cargill had an exceptional year in 2021. The global food company, which dominates markets such as corn and beef, reported almost $5 billion in net income in the fiscal year, up 64 per cent from the $3 billion it earned in 2020, marking the largest annual profit since its inception 156 years ago.

So did Canada's grocery stores, which collectively made $3.9 billion more in pre-tax profit in 2021 than they did before the COVID-19 pandemic. Even as their supply costs went up, the industry hit record-high profit margins in the first quarter of 2021, all part of a banner year that saw grocery CEOs take home millions in bonuses.

The COVID-19 pandemic plunged the world into an economic crisis that has left many Canadians struggling to make ends meet while consumer prices grow at a pace not seen in 30 years. Yet many of the companies reporting higher expenses as a result of that inflation have also expanded their profit margins to pre-pandemic or even record-breaking levels.

Two new reports, released this week, suggest that a substantial portion of the inflation Canadian consumers are experiencing today are attributable to companies boosting their prices well beyond the rate at which they are paying for their supplies.

One of those studies, published Tuesday by the Canadian Centre for Policy Alternatives, theorizes that Canada's present rate of inflation would be at least a quarter lower were it not for the gains these companies have made on price hikes.

We always think there's this complicated story we have to tell about inflation - about government spending, and about too much money chasing too few goods - but I think it can be boiled down to a much simpler story: that companies are taking advantage of this situation by increasing their prices to pad their profits," said David Macdonald, senior economist at the CCPA and author of the study.

The CCPA report compared the rate at which corporate profits increased during the pandemic to the rate at which consumer prices increased.

Across all sectors of the economy, corporate profits have grown by $22.9 billion since 2019, reaching an all-time high of $445 billion in 2021. Meanwhile, over the course of the pandemic, Statistic Canada's consumer price index has increased 6.2 per cent as Canadian households pay $87 billion more for goods and services now than they did two years ago.

The average Canadian household, in other words, is paying $5,807 more in goods and services in 2022 than in 2019.

(To do this calculation, Macdonald multiplied Statistics Canada's 6.2 per cent inflation rate with average household expenditures of $93,724 in 2019 and the 14.98 million households recorded on the most recent census).

Dividing the increase in household spending by the increase in corporate profit growth, Macdonald found that roughly 26 per cent of today's higher inflation can be attributed to higher corporate profits.

This is a rough calculation, since corporate profits can increase for a variety of reasons, including a hike in the price of goods and services," said Macdonald.

Companies typically point to higher input costs to explain price hikes. Restaurant Brands International, which owns Tim Hortons, recently told investors it raised prices in 2021 given the level of commodity costs and labour inflation." Dollarama, too, recently told shareholders it will raise some of its retail prices to a new high of five dollars.

But the CCPA study also noted that, while total corporate expenses grew by $120.7 billion between 2019 and 2021, total corporate revenue grew by a greater $152.2 billion, representing a profit margin of 20.7 per cent.

Suffice to say that increases in corporate profits are on the right scale to be playing an important role in consumer price increases," said Macdonald.

The CCPA study used data from Statistics Canada to track corporate profits across all sectors of the economy, from companies both public and private. When looking solely at publicly-traded companies, as economist DT Cochrane did in his report released Wednesday, the distance between corporate expenses and revenue is wider.

That study, published by non-profit advocacy group Canadians for Tax Fairness, found that annual sales revenue among Canadian public companies increased by $174.5 million between 2019 and 2021. Comparatively, those companies' annual expenses only increased $16.9 million. That means that $157.6 million in revenue per firm - or 90.3 per cent of increased sales - amounted to profits.

The research found that corporations nearly doubled their profit margins to 16 per cent in 2021 by increasing what they charge for goods and services.

While much emphasis is put on inflation being caused by government spending, the corporate pursuit of higher profits through price increases is a much simpler explanation, though more poorly understood and less discussed," wrote Cochrane.

Both think tanks released their studies days before the federal government releases its 2022 budget, which some advocates hope will contain broader tax measures for companies that earned windfalls during the pandemic.

It is critically important that both rising profit margins and all-time lows in corporate taxation be addressed," wrote Cochrane.

Our previous research shows that in 2021, corporations enjoyed their lowest ever effective income tax rate of 16.6 per cent, which contributed to the sharp rise in corporate profit."

Jacob Lorinc is a Toronto-based reporter covering business for the Star. Reach him via email: jlorinc@thestar.ca