How are businesses losing money when they can just ‘price gouge’?

Last week, Forbes reported:

The Walton heirs have lost a staggering $33.7 billion in the last two days as shares of their family’s retailing giant, Walmart, continue to be pummeled.

The reason for the carnage? The company said on Tuesday that its profits had been slammed by higher costs on everything from products to shipping to labor. As a result, net income for the quarter through April fell 25% from a year ago, with earnings per share coming in below analyst estimates.

The same day, the Star Tribune wrote that Target had become “a symbol of inflation’s toll on the American economy”:

The Minneapolis-based retailer’s latest quarterly profit was halved compared to a year ago as it contended with higher costs and changes in shopping habits, news that spooked investors fearing signs of recession.

The company’s sales grew 4% to $25.2 billion in its fiscal first quarter that ended April 30. But its cost of sales grew more than 10% and general expenses also grew sharply, with executives citing record fuel costs as one example.

As a result, Target’s profit dropped to $1 billion from more than $2 billion a year ago. And executives said that rising costs would continue to erode profits for the next several quarters. They’ve raised prices on some items, but they said they won’t pass on to consumers all the cost increases the company is facing.

As inflation has surged, ‘price gouging’ has become a popular bogeyman. This argument says that prices are rising because business owners are greedy. Exactly why business owners have suddenly become more greedy in the last year or so is left unexplained.

The ‘price gouging’ explanation for rising prices presupposes that businesses are raising their prices for reasons unconnected with their fundamentals. The figures for Walmart and Target show that, in these cases at least, that isn’t true. I noted in February that the Producer Price Index (PPI), which measures wholesale prices, was running ahead of the Consumer Price Index (CPI), which measures retail prices. Data for April show that that is still the case. Simply put, the price of business inputs is rising faster than the price of business outputs. That, not a sudden, mysterious surge in greed, is why they are raising prices.