Why corporations aren’t afraid to raise their prices

You already know everything costs more the cost of living has soared to its highest level in 33 years consumer has a right to know why prices are going up there’s little hope for Price stabilization costs of Transportation are steadily climbing but is that because of inflation or because

Corporations want to make a profit and how separate are those two things anyway the Bank of Canada and other central banks say corporations have been faster to increase the price and some say that’s feeding into inflation my colleague Pete Evans looked into this so I called him up to

Understand more about what’s going on hey Pete hey so what has the Bank of Canada noticed about corporate pricing strategies basically just said they’ve noticed that uh companies aren’t as afraid of raising their prices as they used to be businesses have also changed the way they set prices for their goods

And services raising prices more often and by larger amounts so it’s fascinating and that you know like we’ve had shocks to the economy on the demand side before we’ve had gas prices go up we’ve had shortages and certain materials for the most part you would just sort of swallow that to keep your

Customers happy knowing that if you raise it too much you would lose them this idea of making consumers pay for the extra cost of production it’s called cost pass through according to a Bank of Canada survey even before the pandemic most businesses were expecting their cost to rise but the majority of them

Weren’t going to increase their prices meaning businesses were expecting to spend more but instead of passing those costs onto consumers they were okay taking the hit so let’s let’s take this uh this temporary hit on the price of our delivery bands has gone up to fill

Up a tank by $20 every delivery but instead of passing that on let’s just absorb that cuz we’re worried that we might um we might upset some of our customers and therefore they might not call us next time they might call the other guy uh who didn’t raise their

Prices so what changed why were businesses suddenly okay with frequent price increases markets tanking businesses closing shelves empty the economic toll extensive coverage of the Corona virus pandemic the pandemic meant a lot of price increases labor shortages supply chain issues and add on top of that natural disasters and

War in some places you can actually see this playing out this is the frequency of price increases and decreases in the UK this shows how often companies were changing the prices and between 2018 and 2020 it was relatively stable prices weren’t changing that much but after 2020 price increases started to become

Way more frequent price decreases not so much costs went up everywhere at the same time demand for many goods and services also went up and this time companies could charge more because customers expected things to cost more think about how we buy things you have a

Sort of number in your mind for what a pair of jeans cost or a bottle of wine cost if you go into the store and you see the price is twice as high you might go shop around somewhere else knowing I’m not going to pay that I’m going to

Go there so what this requires is the sort of like consumer belief widespread that like there are legitimate reasons I’ve been hearing about it for months like the cost of energy has gone up the cost of this has gone up once that switch has been turned on in our brains

It’s really really much easier for them to say well yeah the price of this banana went up because it has to and you don’t sort of question it as much we’re okay with paying more because we were tuned into the reasons why things cost more it just seemed Justified so instead

Of absorbing extra cost like they had in the past companies pass them on to the customers and because you’re paying more companies get to maintain their profit margin it might seem like higher costs are the result of inflation but some economists say these pricing tactics are now actually driving inflation uh

There’s a lot of things that are factors in our current Bel of high inflation like supply and demand like monetary policy the available of money that’s out there government spending all that stuff is a factor but in terms of corporate pricing it’s feeding into inflation

Because like for the most part A lot of those other factors in inflation have been dealt with so all those very legitimate reasons for inflation have started to go white but for some reason corporations are still more than happy to keep raising their prices some economists are using the

Term profit L inflation what does that mean that’s a $10 word for what we’re talking about here this is a face as the name implies it’s when corporate profits are instead of being at the end of the chain they’re in fact leading inflation right so sort of you know companies are

Saying we’re going to run our business here we have a profit margin after all of our costs are done now they’re saying well our margin is 20% so let’s just like raise our prices in case costs go up and we’ll protect it that way so like instead of prices going up being the

Result of something happening it’s now sort of sort of driving the bus right the Bank of Canada won’t say how much this is driving inflation but other Banks like the European Central Bank are more willing to put a number on it so by their math basically 2/3 of the

Inflation in Europe in 2021 was caused by corporate pricing normally it’s 1/3 and it sort of doubled functionally as a share of overall inflation there’s some data out of the US from the Kansas City fed that show something similar the role of corporate profits was like twice as

Much as it normally is in sort of factoring inflation so by not absorbing the cost the way they used to corporations may be feeding into the cycle of inflation keeping prices high but we are seeing signs this is SL slowing down so finally we’ve gotten to

The good news portion of this we are starting to see in the data that the sort of profit share of the overall unit cost is finally starting to come down the numbers show uh corporate profits are starting to slow down coming back to a much more normal level generally and

By extension the uh the amount of this profit Le inflation is starting to come back down to not normal but it’s it’s sort of it’s well over the peak anyway we expect the economy to remain weak for the next few quarters which means there’s more downward pressure on in the

Pipeline in short the excess demand in the economy that made it too easy to raise prices is now gone but a return to normal won’t happen overnight the head of the ECB says getting inflation under control will take a lot longer if corporations aren’t willing to absorb

Some of the costs for this to happen we need to ensure that firms absorb Rising labor costs in margin H so what can you do as a consumer in the meantime the power for consumers in the situation is is where you can shop around around just you know

Be choosy about every dollar you spend because every dollar you spend is being interpreted by you know policy makers and Central Bankers but also like accountants at companies say okay well yeah let’s raise the price of this can of beans by 10 cents and see what

Happens if what they see is that they’re selling more than 10% fewer cans of beans they’re going to try to adjust that some so I’m not going to put like the burden on consumers to say well it’s your job to shop around and if you know

Your rent goes up by 500 bucks you should just move but just sort of be aware that every dollar your spending is a choice you’re making and it’s a message that you’re sending about your uh your willingness to to do it make sure to check out the description below for our sources and

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Canadians are living in an era of high inflation. We explore how corporations that raise prices are putting the burden of high inflation on consumers.

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