Walmart and Target play Greedflation’s death knell

It’s hard to believe that it was only last week that Democrats hoped to change the narrative on inflation by shifting the blame for rising prices onto greedy corporate price gougers.

In a speech Tuesday of last week, President Joe Biden complained that “corporate executives are on earnings calls with investors on Wall Street, applauding their record profits and explaining how they are using this period of inflation to cover rising prices far beyond what they need to do to cover their costs.” On Thursday, Senators Elizabeth Warren (D-MA) and Tammy Baldwin (D-WI) and Rep. Jan Schakowsky (D-IL) proposed a bill to combat inflation by banning “price gouging,” defined very broadly as “unconscionably excessive price increases”.

The best evidence the greedflationists could muster to support their theory of a corporate conspiracy to boost profits was the expansion of profit margins last year. Gasping in horror at rising profits at a time of rising profits may be a time-honored tradition, but it’s also a display of ignorance of basic economics. Inflation is usually the result of an imbalance between supply and demand. When demand increases faster than supply, prices go up. This increases the profits of the people who sell the goods and services. John Maynard Keynes, whom some on the left claimed to have read, called this phase of an inflationary era “earnings inflation.”

The thing about earnings inflation is that it leads very quickly to what Keynes called “earnings inflation.” Companies try to sell more at higher prices, expanding production and hiring workers. This drives up prices for materials, products, storage, shipping, and most importantly, labor. The increased demand for consumer goods that lifts corporate profits subsequently fuels the demand for labor and other factors of production. This, in turn, wipes out excess profits.

This swing could be seen this week in the quarterly reports of Walmart and Target. Both reported that sales were increasing, but profits were falling. Costs on the back end were rising and were not expected to moderate. Corporate profit inflation was eaten up by cost inflation.

A Target store is seen on August 19, 2020 in Miami, Florida.  The company announced record sales growth online and in established stores over the past three months, sending Target shares up more than 12%.  (Photo by Joe Raedle/Getty Images)

A Target store in Miami, FL, on Aug. 19, 2020. (Joe Raedle/Getty Images)MOREHIDE

Note that this inflation is evidence of competition in the economy: large companies competing with each other for access to storage, workers, and shipping. They are bidding on fuel costs. Senator Warren wants to blame inflation on anti-competitive behavior, but it is actually being driven by competitive activity. Instead of having market power that allows them to control prices, these large corporations cannot raise prices to keep up with costs because they compete with each other for customers.

Target was pretty explicit about it. He said he had decided not to try to pass on higher costs to consumers because he hopes to gain market share from rivals while maintaining a reputation for affordability. “While we don’t like the impact on our profitability in the short term, we know it’s the right thing to do for our guests and our business in the long term,” Target’s chief financial officer said.

And with those words, the greed theory was thrown into the dustbin of history.

Is slow inflation next?

Of course, the story of inflation does not end with the elimination of excess profits due to rising wages and production costs. Consumers react to rising prices by changing their consumption habits. Walmart talked about customers switching from national brands to private labels for things like deli meats. The University of Michigan’s preliminary consumer confidence survey for May saw a record in the number of consumers who think now is a bad time to buy durable goods. This cyclical pattern is likely to be amplified by consumers shifting their spending from goods to services, reversing the large shift in the spending balance brought about by the pandemic.

Target CEO Brian Cornell spoke about a shift in consumption on Wednesday:

In our other three main merchandise categories, Apparel, Home and Hardwear, we saw a rapid slowdown in the year-over-year sales trend in early March, when we began to annualize the impact of last year’s stimulus payments.

While we anticipate a post-stimulus slowdown in these categories and expect the consumer to continue to refocus their spending from goods to services, we do not anticipate the magnitude of that change.

This change could explain the drop in demand seen in the Empire State manufacturing survey released on Monday. We’ll take a look at how widespread this is on Thursday when the Philadelphia Fed releases its manufacturing survey. Expectations are for a slight downward trend. Those were, however, the same expectations for the New York Fed survey. A surprise to the downside in the Philadelphia Fed survey could spark fears of a broader economic slowdown and further hits to corporate profits, at least for producers and sellers of goods.

FREMONT, CA - SEPTEMBER 29: Tesla CEO Elon Musk exits the new Tesla Model X during an event to launch the company's new crossover SUV on September 29, 2015 in Fremont, California.  After several production delays, Elon Musk has officially launched the highly anticipated Tesla Model X Crossover SUV.  (Photo by Justin Sullivan/Getty Images)

Tesla CEO Elon Musk exits the Tesla Model X during an event on September 29, 2015 in Fremont, CA. (Justin Sullivan/Getty Images)

Elon’s Odyssey

Is it possible that Elon Musk is turning red? Musk started out as a darling of the left and an icon of the radical greens, so he naturally gravitated to supporting the politics of his biggest fans. He began showing signs of alienation during the pandemic shutdowns, when he threatened to move Tesla’s headquarters from California to Texas and restarted production in defiance of state authorities.

He is now one of the country’s leading advocates for free speech online; although given its historical closeness to repressive regimes in China and the Middle East, there is room for skepticism about the depth of this attachment. Still, if his position is simply that the US needs or deserves free speech more than other countries and cultures, that would be preferable to the people constantly trying to foist the ultimate Ministry of Truth on us.

Now, however, he has crossed the line and announced that he will vote, gasping, Republican.

“In the past I voted for the Democrats, because they were (mostly) the party of goodness. But they have become the party of division and hate, so I can no longer support them and will vote Republican. Now watch their dirty tricks campaign against me unfold.” Musk tweeted.

Alexandria Ocasio-Cortez is probably thinking about trading in her Tesla right now.

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