Some elements of this story were previously reported by Benzinga and it has been updated.

Amidst the COVID-19 pandemic, American businesses experienced an unusual trend where consumers were willing to pay a premium for their desired goods and services. This sudden surge in demand allowed companies to offset the rising prices and boost their profit margins to levels equal to or greater than pre-pandemic times.

In fact, some corporate leaders even boasted about their newfound ability to increase prices during earnings calls.

U.S. Rep. Katie Porter called the bluff, claiming increased corporate profits account for more than half of the higher prices Americans are paying in light of the fact that inflation reached 40-year highs last year.  

Rep. Porter said this past fall that investing in workers and infrastructure strengthens the U.S. economy. Paying for it and generating surplus revenue with taxes on the ultra-wealthy helps to keep prices down for families.

Read Also: Biden's Economic Advisers See Signs 'Fed Actions Are Having Effect' Amid Inflation Woes

It is crucial to examine prices and how they are being impacted in order to properly comprehend this policy issue.

The three primary cost components can be used to break down the price of almost everything in the American economy.

These include the "mark-up" of earnings over the first two components, nonlabor inputs, and labor costs.

The non-financial corporation (NFC) sector of the economy, which includes businesses that create goods and services and accounts for around 75% of the whole private sector, has solid data on these various cost components.

Read Also: Why The Fed Needs To 'Break The Labor Market' To Avoid A 'Wage-Price Spiral'

Overall prices in the NFC sector have increased at an annualized pace of 6.1% since the COVID-19 recession's peak in the second quarter of 2020, a notable acceleration above the 1.8% price growth that defined the pre-pandemic business cycle of 2007–2019.

Surprisingly, higher profit margins account for 53.9% of this increase, with labor costs only accounting for less than 8% of the rise.

Profits only accounted for roughly 11% of price growth from 1979 to 2019 while labor costs accounted for more than 60%. In the present economic recovery, nonlabor inputs are also pushing prices up higher than usual.

It is exceedingly difficult to reconcile recent inflationary arguments that are solely based on macroeconomic overheating with the historically high-profit margins in the economic recovery from the pandemic.

Evidence from the last 40 years clearly supports that as unemployment declines and the economy strengthens, profit margins should contract and the portion of corporate sector revenue going to labor compensation (or the labor share of income) should increase.

Expectations of inflation based only on assertions of macroeconomic overheating should be seriously questioned in light of the fact that the recovery has so far followed the exact opposite path.

A temporary excess profits tax would be a good method to stop corporate power from being used to raise prices in the upcoming year.