Column: The risk of US inflation remaining high, the ``corporate profit'' factor that does not attract attention | Reuters

ORLANDO, Fla. (Reuters) - The Federal Reserve and other central banks are determined to avoid a 1970s-style wage-price spiral at all costs. I'm tired. But last week's latest gross domestic product (GDP) data suggests that the risk of persistently high inflation is a bit more complex.

The Fed and other central banks are obsessed with avoiding a 1970s-style wage-price spiral. But the latest U.S. GDP data, released last week, suggests that the risk of persistently high inflation is a little more complex. New York Manhattan seen from New Jersey. Photographed in April 2021 (2022 REUTERS/Eduardo Munoz)

I would like to call the problem that I am going to raise from now on the "corporate profit/price spiral."

By most measures, the U.S. labor market is at its strongest in decades. And since labor is a firm's single largest input to production, policy makers are right to fear that "excessive" wage demand will cause or even fuel inflation.

But through the prism of corporate profits, American companies, especially the big ones, are in pretty good shape. In the second quarter of this year, U.S. companies posted record profits or near half-century levels.

Isn't this also a threat of inflation? But policy makers are less alarmed about the danger of inflation to corporate profits than the risk of a cascading rise in wages and prices.

In the tug-of-war between worker distributions and corporate retained earnings, the share of GDP has risen over the past three decades, and the trend is neither new nor political.

But now that the inflation rate is the highest in 40 years, it is emerging as a challenge for policy makers. Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, also said it's something the Fed should consider.

“There is no doubt that an increase in corporate profits indirectly encourages the Fed to raise interest rates,” Zaccarelli said. It pointed out.

Business profits accounted for 12.25% of GDP in the second quarter, the highest since 1950. Gross margins for non-financial companies stood at 15.5%, close to last year's highest since the 1960s.

It's no big surprise that nominal corporate profits hit a record high, but it's still notable that they broke the $2 trillion mark.

At the same time, the U.S. labor market is at its tightest point in decades. The last time the unemployment rate dropped below its current 3.5% was more than 50 years ago, and there are now about two job openings for every unemployed person.

Workers' strikes and wage disputes are less likely in the United States than in Europe, but the Fed won't welcome wage growth matching inflation. Moreover, they seem to be even more reluctant to see wages rise faster than prices.

The Fed is expected to argue that such wage increases will do one of two things. Both cases go against the Fed's mandate of stabilizing prices and maximizing employment. One is that companies pass on higher wages to consumers, accelerating inflation, and the other is that companies simply cut their workforce.

Fiscal policy is better suited to curb the pricing power of U.S. companies. As former Labor Secretary and University of California, Berkeley professor Robert Reich points out, the Biden administration recently passed legislation that introduced a 1% tax on share buybacks and a minimum corporate tax rate.

While Mr. Reich criticizes this as being too far-fetched, he admits that taxing windfall profits, controlling prices, raising corporate taxes, taxing the wealthy and tightening antitrust enforcement will face fierce opposition in Washington. .

If strong fiscal action is not taken, the heavy lifting will fall to the Fed's monetary policy. The Fed has no choice but to raise interest rates, which could hurt jobs and cause a recession.

“Hikes are the only tool the Fed has to combat inflation.

There is little doubt, however, that the Fed's communications focus more on risks around wage pressures than on corporate pricing.

The Fed's July 26-27 Federal Open Market Committee (FOMC) minutes mentioned "wages" seven times, "labor market" 17 times and "employment" eight times. On the other hand, "profit" was zero.

Fed Chairman Jerome Powell's remarks at the press conference on July 27 also mention "wages" 9 times, "labor market" 38 times, and "employment" 15 times. Nor.

Politics may become passive in terms of stopping the overheating of corporate profits, and the economy may act autonomously even if the Fed has little power.

If financial conditions tighten, economic activity and demand will slow, which will inevitably lead to slower earnings growth and lower profit margins.

Societe Generale's team of equity analysts said on Thursday: "Corporate profit growth is slowing to zero. This means downward pressure on profit margins, which are currently at 5% this year. The consensus forecast is that it will go down."

(The author is a columnist for Reuters. This column is based on the author's personal opinion.)