Goldman Sachs: US corporate markups surge as wealthier consumers prioritise time over price
After-tax profits as a share of value added have doubled since the late 1980s, driven by declining price sensitivity among higher-income households and widening income inequality.
US companies have significantly increased price markups, a trend that has contributed to expanding gross profit margins and rising corporate earnings, according to research from Goldman Sachs. This development persists despite widespread consumer dissatisfaction with inflation, as higher-income households increasingly prioritise time savings over the search for lower prices.
The research indicates a substantial structural shift in the relationship between costs and consumer payments. After-tax corporate profits as a share of value added have roughly doubled from approximately 5 per cent in the late 1980s to over 10 per cent recently. Over the same period, firms have substantially raised markups, defined as the amount by which prices exceed the marginal cost of producing goods and services.
While at least some of the trend toward rising markups can be attributed to falling costs, the data suggests that customer payments increasingly cover amounts well beyond production expenses. Goldman Sachs economists cited two studies providing evidence of this increasing price markup, which aligns with broader data showing that gross profit margins have continued to expand despite economic headwinds.
The decline in consumer price sensitivity is linked to rising incomes, which increase the opportunity cost of time for wealthier shoppers. Goldman economists noted that higher income leads consumers to search less for lower prices. This dynamic has reinforced the "K-shaped" economic narrative, where higher-income cohorts drive spending while lower-income households retrench.
Economist Kunal Sangani estimates that increases in average income and income inequality accounted for a roughly 8 percentage point rise in the aggregate retail markup from 1980 to 2018. As less price-sensitive households account for a larger share of total consumption, the pricing power of corporations has strengthened, allowing earnings growth to continue even as sentiment surveys confirm consumers remain unhappy with rising prices.
