Fact check: Are corporate profits at record highs because companies are 'overcharging?'
Posted January 7, 2022 4:36 p.m. EST
Updated January 7, 2022 5:28 p.m. EST
A Democratic congressional candidate in North Carolina says corporations are making more money than they have in seven decades.
Former state Rep. Erica Smith is campaigning to represent North Carolina’s newly-drawn 2nd Congressional District. On Dec. 30, she tweeted:
“Corporate profit margins are at their highest point in 70 years. Corporations are trying to blame inflation on stimulus checks. Meanwhile, they’re overcharging us for gas, medicine, and groceries, and pocketing the difference. It’s a racket.”
PolitiFact has written multiple fact checks on inflation, wages and whether the cost of goods is related to presidential policy. Smith’s comments address a different angle of high prices, and we wondered whether she was right.
It turns out that, after taxes, corporate profits did hit a 70-year high last year, according to the Federal Reserve Bank of St. Louis, citing U.S. Bureau of Economic Analysis data. But economists say Smith’s tweet gives a misleading impression about the prices of gas, groceries and medicine.
The prices of various goods have climbed as demand has increased for limited supply. Despite that, companies have been able to keep profit margins high by cutting costs and passing higher costs along to consumers, Reuters reported in September.
Government numbers, which aren’t adjusted for inflation, were updated on Dec. 22. They show that corporate profits in the quarter ending Sept. 30 tallied $2.7 trillion dollars, the highest level since 1950. Corporate profits in the previous quarter also reached a high as a percentage of gross domestic product.
Smith’s campaign cited a Bloomberg News article about the profits, titled: “Fattest Profits Since 1950 Debunk Wage-Inflation Story of CEOs.” The “pocketing the difference” line in Smith’s tweet comes from President Biden, who called out gasoline companies that kept prices high at the pump even as wholesale gas prices started to decline.
Bloomberg created a chart showing the gap between wholesale gasoline and the price at the pump, on a rolling five-day average. Bloomberg’s data showed the gap rising from $1.18 per gallon in early August to $1.42 in late November.
Yardeni Research, a consulting firm offering financial analysis, in December produced a report on the profit margins of S&P 500 companies. The report shows corporate profit margins at their highest levels since at least 1994.
Smith is certainly not the first Democrat to point the finger at corporations during the pandemic. Economists who spoke to PolitiFact NC said the first line of Smith’s tweet is generally accurate. However, some said her comments about companies “overcharging us for gas, medicine, and groceries” need additional context.
The price of gas, groceries and medicine
Economists recently told the New York Times that it doesn’t make sense to blame businesses for profit-seeking in recent months, considering that supply is low, demand is high, and the government recently put more money in Americans’ pockets.
“I do not necessarily agree with the claim that the current record level of the profit margin shows that businesses are ‘overcharging us for gas, medicine, and groceries, and pocketing the difference,’” said Gary Burtless, an economist at the Brookings Institution.
Burtless said the Yardeni report shows that “the current high rate of profitability may be offsetting sharply lower profit rates the same companies experienced in the months in 2020, when the pandemic dramatically reduced the profitability of many companies’ operations.”
Exxon Mobil Corp. Last year, Exxon Mobil Corp., for instance, reported a third-quarter profit margin of 9.4%. That figure is the company’s highest since 2017. Meanwhile, gas prices, which plunged in March and April 2020 as the pandemic took hold and fewer people commuted to work, are on average about 67 cents per gallon higher now than they were in January 2020. But prices are lower than they were in portions of 2012, 2013 and 2014, according to GasBuddy, a company that tracks U.S. gas prices.
When it comes to medicine, consumers in America do tend to pay more for prescriptions than those in other countries. Researchers at the University of Southern California and at Brookings found that U.S. consumers account for about 64% to 78% of total pharmaceutical profits. While the prices of some prescription drugs are regulated, AARP in June released a report that said retail prices for 260 widely-used prescription drugs increased in 2020 by an average 2.9%, more than twice the general rate of inflation.
As for groceries, economists balked at the notion that local grocers are shaking down customers.
“Profit margins vary dramatically not only by industry, but by company,” said Scott Lincicome, a senior fellow in economic studies at the libertarian Cato Institute. Historically, grocery stories and gas stations have “notoriously low profit margins,” he said in a phone interview.
Kroger, one of the largest grocery store chains in the U.S., reported a third-quarter profit margin of 1.5%, down compared to the same period in 2019. The third-quarter figure isn’t historically high.
The cause of rising grocery prices is more a tale of supply and demand than of corporate greed, said Lincicome and Dean Baker, an economist and co-founder of the Center for Economic Policy and Research.
“The high prices are a pretty simple story that there is a big jump in demand and no corresponding increase in supply,” Baker told PolitiFact in an email.
“I don't see any special conspiracy story there,” he said. “I expect prices to moderate as demand falls back to some extent and supply increases.”
Smith said “Corporate profit margins are at their highest point in 70 years … they're overcharging us for gas, medicine, and groceries, and pocketing the difference.”
Government data show that Smith is right about the profit margins of companies in the U.S., collectively speaking.
Consumers in the U.S. tend to pay more for medicine than consumers in other countries. Oil companies are also making more money lately. However, economists say it’s misleading for Smith to suggest that your neighborhood grocery store or gas station is running what she described as “a racket.”
The statement is partially accurate but leaves out important details or takes things out of context. We rate it Half True.