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Energy costs are fueling inflation worldwide. It is also being discussed whether large corporations are driving inflation.
The discussion in the USA was initiated by Robert Reich. The former economic adviser to President Barack Obama and minister under Bill Clinton still writes books and columns today. With his videos on social media, he reaches more than four million followers.
The cause of inflation is the market power of large companies, which could dictate prices, Reich explains in a recent video – using the example of Pepsi and Coca-Cola: “Pepsi has increased prices because the costs of raw materials, transport and wages have risen – and then reported $3 billion in profits.” And Pepsi’s big rival Coca-Cola has also increased prices and thus profits.
Instead of the competition forcing companies to lower prices, a few large corporations can raise prices at will, criticizes Reich. The energy companies would also continue to fuel inflation in this way.
Huge margins in the tech sector
The “Handelsblatt”, a thoroughly business-friendly publication, recently devoted a full eight pages to the topic under the title “Power economy instead of market economy”. The German newspaper quoted the Bonn economics professor Hermann Simon as saying: “Where there is no competition, the customer pays!”
In the conversation, Simon gives an example: “In the food retail sector in Germany, four companies have 85 percent of the market.” And in the tech sector, Apple, Alphabet-Google, Microsoft or Meta-Facebook, with their high market shares, achieve profit margins of 25 to 35 percent – there is hardly any other area of the economy like that. “That’s a horrendously high number.”
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Apple, for example, had sales of $368 billion in 2021. “Combined with the high net margins, this results in historically unique profits,” says economics professor Simon.
key stone
Nevertheless, Professor Simon does not see the tech companies directly as drivers of inflation, since their services only make up a small part of the shopping basket used to calculate inflation.
Something else is problematic: “These corporations are so big in terms of their purchasing power that the rest of the economy basically has no chance. The phenomenon is comparable to the situation around the year 1900. At that time there was Rockefeller’s monopoly Standard Oil in the oil industry.
Huge profits thanks to high prizes
Even today, the large energy companies are extremely profitable thanks to their market power. Simon calculates that the five largest American and European energy multinationals made profits of $62 billion in the second quarter alone.
These are huge profits, thanks to high prices that other companies and consumers would have to pay for – and that contribute significantly to inflation.
For almost all economists, the impact of rising energy prices came as a surprise.
Rudolf Strahm, the economist and former Swiss price monitor, sees it that way too. “For almost all economists, the impact of rising energy prices came as a surprise. The agricultural products are further processed with energy, the transport costs, the entire logistics – this is now reflected in the prices of everyday goods in a second round.”
But apart from the energy prices, Strahm is less concerned: “In the longer term, corporate power in the market has declined. When it comes to everyday consumer goods, we tend to have increased competition.” And this competition means that prices for consumer goods should not continue to rise excessively.