“We’re seeing this expansion of margin under the cover of, ‘Oh, it’s a general inflation problem, we can’t help it,’ Paul Donovan of UBS said Thursday.
Yeah that seems like bullshit. If they raised prices proportionally profit levels would remain flat.
Not necessarily. Let’s say I’m a corporation, who sells a widget for $100. It costs me $80 to produce said widget and I keep $20 in profit. Now, let’s say inflation is 25%. My cost per widget is has increased to $100. To keep up with inflation, and to maintain the same percentage of profit, I need to raise my prices to $125. This gives me a record profit of $25 per widget, while still maintaining the same proportion of profit as before.
If we only discuss the dollar value in terms of profit, it’s hard to tell if record profits are coming from inflation or price gouging or both. If the percentage profit remains unchanged, then it’s likely more to do with inflation than price gouging.
Isn’t this $5 extra you’re overcharging the consumer, because inflation would affect the supply chain as well. 25% would raise cost of production to $100, keep your profit at $20 and cost to consumer will rise to $120.
Of course, demand on a widget might rise or fall during inflation too.
In real terms the $25 post inflation is the same value as the $20 was pre inflation.
Look at it another way. You are a worker bee who makes $20 an hour. If inflation is 25%, your employer should give you a raise to $25 an hour to maintain your compensation at the same level. If they do not, they have effectively given you a pay cut.
