Key Takeaways
- Consumers report strong dislike of rising prices, yet their spending remains robust.
- Corporate profit margins have expanded markedly; after‑tax profits as a share of value added rose from ~5% in the late‑1980s to over 10% today.
- The margin gain is driven largely by higher price markups that firms have been able to impose.
- Declining consumer price sensitivity—linked to rising incomes and the opportunity cost of time—makes shoppers less likely to trade down when prices climb.
- Higher‑income households, which are less price‑sensitive, now account for a larger share of total consumption, reinforcing a K‑shaped growth pattern.
- The tension between negative sentiment toward inflation and continued spending helps explain why the economy can grow while corporate earnings rise.
- From an investor’s viewpoint, the ability of publicly traded companies to sustain earnings growth justifies tolerating higher prices, even as consumers feel the pinch.
Consumer sentiment surveys consistently reveal that people are acutely aware of and unhappy about rising prices. Inflation is viewed unfavorably, and many voice complaints about the cost of living. Despite this negative sentiment, hard economic data show that spending has not retreated in the face of higher prices. Retail sales, services consumption, and overall demand remain strong, suggesting that the aversion to inflation does not translate into a pull‑back in purchasing behavior.
This apparent contradiction helps clarify why the broader economy continues to expand, profit margins keep widening, and corporate earnings keep climbing even as consumers voice displeasure. A recent research note from Goldman Sachs ties these dynamics together by highlighting two strands of evidence. First, several studies (cited in the note) demonstrate that U.S. firms have been steadily increasing the markup—the amount by which their selling prices exceed the marginal cost of production—since the 1980s. Correspondingly, after‑tax corporate profits as a share of value added have roughly doubled, moving from about five percent in the late‑1980s to more than ten percent today. While some of the markup rise can be attributed to falling input costs, the central observation is that a growing portion of what consumers pay now exceeds the pure cost of goods and services.
The second strand of evidence addresses why consumers have not pushed back more forcefully against these higher prices. Goldman economists point to research indicating that consumer sensitivity to price has been declining over time. A key driver of this trend is rising household income: as earnings grow, the opportunity cost of spending time searching for lower‑priced alternatives increases. In other words, wealthier consumers find it less worthwhile to devote effort to bargain‑hunting, making them more willing to accept higher sticker prices. This effect is not uniform across the income spectrum; affluent households exhibit markedly lower price elasticity than lower‑income households.
The income‑price‑sensitivity link helps explain a portion of the observed rise in aggregate retail markups. Economist Kunal Sangani’s estimates suggest that increases in average income, combined with growing income inequality—meaning that a larger share of total spending now comes from less price‑sensitive, higher‑income households—can account for roughly an eight‑percentage‑point increase in the average retail markup between 1980 and 2018. This dynamic dovetails with the K‑shaped economic narrative, wherein the upper‑income segment drives consumption growth while lower‑income groups either stagnate or cut back, creating a diverging pattern of economic activity.
For those familiar with the concept of price elasticity of demand, the mechanics are unsurprising: when a larger share of spending comes from consumers who are less responsive to price changes, firms can raise prices without suffering a proportional drop in quantity sold. Nonetheless, the discussion remains timely because it illuminates why corporate profit margins stay high despite widespread consumer distaste for inflation. The phenomenon captures a broader tension between how people feel about the economy (negative sentiment toward rising costs) and how they actually behave (continuing to spend, often at higher prices).
From a personal standpoint, as a consumer I dislike paying more and would prefer to benefit from any cost savings that firms might achieve. Yet, like many individuals described in the cited studies, I frequently find myself grudgingly accepting higher prices rather than trading down to cheaper alternatives. As an investor, however, I can tolerate this dynamic so long as it translates into sustainable earnings growth, which is bullish for the stocks in my portfolio. This duality underscores the internal conflict many experience when their affective reaction to price increases diverges from the economic fundamentals that drive market performance.
TKer, as a stock‑market‑focused newsletter, adopts the investor lens: the evidence shows that publicly traded companies—far from being charitable entities—remain adept at navigating pricing environments to boost earnings and enhance shareholder value. The persistence of high markups, supported by falling cost structures and a consumer base increasingly less price‑sensitive, suggests that the current environment can continue to deliver strong financial results even as sentiment surveys register displeasure with inflation. In sum, the coexistence of negative consumer sentiment and resilient spending provides a coherent explanation for ongoing economic expansion and rising corporate profitability.