As inflation soared, corporate America just racked up its biggest profit margins since 1950

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A measure of U.S. profit margins has hit its highest level since 1950, suggesting the prices companies are charging are exceeding their increased costs of production and labor.

After-tax profits as a percentage of gross value added of non-financial corporations, a measure of overall profit margins, improved in the second quarter to 15.5% – the most since 1950 – from 14% in the first quarter, according to the Commerce Department. figures released Thursday.

The data shows that, overall, businesses have been able to comfortably pass on rising material and labor costs to consumers. With household budgets squeezed by the rising cost of living, some companies have been able to offset any drop in demand by charging more to customers they have retained, although others like Target Corp. saw their stocks swell and were forced to lower prices in order to wipe them out.

Soaring profits during the pandemic era have fueled a debate over whether companies raising prices bear some responsibility for high inflation – an argument pushed by President Joe Biden’s Democrats. Most economists have been skeptical of the idea.

Inflation in the United States has jumped this year and stood at 8.5% in July, which is not far from the peak of the last four decades reached the previous month. Federal Reserve officials have flagged rising wages as one of the big risks that could keep inflation entrenched. But some economists say historically high profit margins mean companies have room to meet workers’ demands for better pay without triggering a wage-price spiral.

“The Wind Is Turning”

Biden allies have pointed the finger at the energy industry, which has posted huge profits this year, for its criticism of price gouging. Democratic Senator Ron Wyden has proposed a measure that would impose a windfall tax on industry profits deemed “excessive”. Similar measures have been adopted in several European countries to help finance measures that will protect consumers from the energy price shock.

Across the economy, adjusted pre-tax corporate profits rose 6.1% from April to June from the previous quarter – the fastest pace in a year – after falling 2.2 % during the first three months of the year. Profits are up 8.1% from a year earlier.

While companies report individual profits based on historical costs, the government adjusts the figures to reflect the current cost of replacing capital stock such as equipment and structures. Due to soaring inflation, current replacement costs are much higher.

Excluding this adjustment, along with the inventory valuation adjustment, after-tax profits rose 10.4% in the second quarter.

With high prices expected to persist and weak consumer sentiment, the current high profit margins may not last through the end of 2022.

In recent weeks, companies ranging from meat producer Tyson Foods Inc. to fashion retailer Abercrombie & Fitch Co. have warned that their margins are under pressure, or are about to.

“We still expect the tide to turn on earnings,” economists Jay Bryson and Shannon Seery of Wells Fargo & Co. wrote in a note after today’s data release. “Continued pricing pressure as we expect a steeper decline in demand in the second half of the year will hamper the ability of businesses to continue to pass on costs.”

—With help from Matthew Boesler.

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