Is corporate greed fueled by inflation? He’s not the biggest culprit

Washington (AFP) – Outraged by price hikes at the gas station and supermarket, many consumers feel they know just where to blame: on greedy companies that are relentlessly raising prices and making profits.

In response to that sentiment, last month the Democratic-led House passed a partisan line vote — most Democrats support it, all Republicans against it — Bill designed to crack down on alleged price gouging of energy producers.

Similarly, Britain announced plans last month to impose it 25% temporary gain tax On the profits of oil and gas companies and transfer the proceeds to financially distressed families.

Yet, despite all the public’s discontent, most economists say that corporate price gouging is, at most, one of the many causes of hyperinflation – not the root cause.

“There are a lot of reasonable candidates for what’s going on,” said Jose Azar, an economist at Spain’s University of Navarra.

These include: Supply disruptions in factories, ports and shipping yards. labor shortage. President Joe Biden’s massive pandemic aid program. COVID 19 has caused lockdowns in China. Russian invasion of Ukraine. And not least, the Federal Reserve that has kept interest rates very low for longer than experts say they should be.

Most of all, economists say, increased spending by consumers and governments has led to higher inflation.

The blame game, if any, is intensifying after the US government reported it The inflation rate was 8.6% in May From the previous year, the biggest price hike since 1981.

To fight inflation, the Fed is now of late aggressively tightening credit. On June 15, he It raised the benchmark short-term interest rate by three-quarters of a point – The biggest rise since 1994 – He pointed out that more significant price hikes are coming. The Fed is hoping for a notoriously difficult “soft landing” — slowing growth enough to curb inflation without causing the economy to slide into recession.

For years, inflation has remained at or below the Federal Reserve’s annual target of 2%, even as unemployment has fallen to its lowest level in half a century. But when the economy recovered from the pandemic recession with astonishing speed and strength, the US consumer price index rose steadily — from 2.6% year-on-year in March 2021 to a four-decade high last month.

For a while at least — before profit margins fell at S&P 500 companies early this year — rising inflation coincided with ballooning corporate earnings. It was easy for consumers to connect the dots: it seemed that companies were engaged in price gouging. This wasn’t just inflation. It was greedy.

Asked about identifying the culprits behind the hike in gasoline prices 72% of 1,055 Americans Polled in late April and early May By the Washington Post and George Mason University’s Schar School of Politics and Government, for-profit corporations were blamed more than those citing Russia’s war against Ukraine (69%), Biden (58%) or pandemic disruptions (58%). The ruling was bipartisan: 86% of Democrats and 52% of Republicans blamed companies for gas price inflation.

“It’s very normal for consumers to see price hikes and get angry about it, and then look for someone to blame,” said Christopher Conlon, an economist at New York University’s Stern School of Business who studies competition between businesses. “You and I cannot set prices at the supermarket, gas station or car dealership. So naturally people blame the companies, because those are the ones who see them as raising prices.”

However, Kunlun and many other economists are reluctant to accuse – or in favor of punishing – US companies. When I asked the University of Chicago Booth School of Business economists this month Whether they support the law To prevent large corporations from selling their goods or services “at an unbearably high price” during a market shock, 65% said no. Only 5% supported the idea.

Economist Azar acknowledges that which set of factors are most responsible for causing prices to rise “remains an open question”. COVID-19 and its consequences have made it difficult to assess the state of the economy. Economists today have no experience analyzing the financial effects of a pandemic.

Time and time again, policymakers and analysts have been shocked by the path the economy has taken since the novel coronavirus struck in March 2020: they did not expect a rapid recovery from deflation, buoyed by massive government spending and record low rates engineered by the Federal Reserve and other central actors. banks. Then they were slow to recognize the growing threat of high inflation pressures, and initially dismissed them as merely a temporary consequence of supply disruptions.

However, one aspect of the economy is indisputable: the wave of mergers in recent decades has killed or reduced competition between airlines, banks, meatpackers, and many other industries. This merger has given the surviving companies the leverage to demand price cuts from suppliers, cut workers’ salaries, and shift higher costs to customers who have little choice but to pay.

Researchers at the Federal Reserve Bank of Boston found that Less competition makes it easier for companies to pass on higher costs For customers, describing it as an “amplifying factor” in the return of inflation.

Josh Bivens, director of research at the Liberal Economic Policy Institute, estimated that roughly 54% of price increases in the nonfinancial business since mid-2020 can be attributed to “larger profit margins,” compared to just 11% from 1979 through 2019. .

Biffins acknowledged that neither corporate greed nor market leverage has likely grown significantly in the past two years. But he noted that during the inflationary spike of COVID, companies have reorientated how they use their market power: A lot has moved away from pressuring suppliers to cut costs and reducing wages for workers and instead boosted prices for customers.

in A study of nearly 3,700 companies released last weekThe left-leaning Roosevelt Institute concluded that profit margins and profit margins last year reached their highest level since the 1950s. It also found that firms that raised prices aggressively before the pandemic were more likely to do so after it hit them, “suggesting a role for market strength as an explanatory driver of inflation.”

However, many economists are not convinced that corporate greed is the main culprit. Jason Furman, the Obama White House’s chief economic adviser, said some evidence even suggests that monopolies are slower than firms that face stiff competition to raise prices when their costs rise, “in part because their prices were initially high.”

Similarly, Conlon of New York University cites examples where prices have risen in competitive markets. Used cars, for example, are sold in lots across the country and by many individuals. However, average used car prices have increased by 16% over the past year. Likewise, the average price of flagship devices, another market with plenty of competitors, jumped about 10% last month from a year earlier.

By contrast, the price of alcoholic beverages is only 4% higher than a year ago even though AB-Inbev dominates the market for beer and spirits from Bacardi and Diageo.

“It’s hard to imagine that AB-Inbev isn’t as greedy as Maytag,” Conlon said.

So, what has driven the inflationary rise the most?

“Demand,” said Foreman, now at Harvard University. “A lot of government spending, a lot of monetary support – all combined to support extraordinarily high levels of demand. Supply couldn’t keep up, so prices went up.”

Researchers at the Federal Reserve Bank of San Francisco estimate that government aid to the economy during a pandemic, which puts money in consumers’ pockets to help them weather the crisis and unleash a spending spree, This led to an increase in inflation by about 3 percentage points Since the first half of 2021.

In a report released in April, researchers at the Federal Reserve Bank of St. Louis Blame it on global supply chain bottlenecks To play an “important role” in inflating plant costs. They found that it added a staggering 20 percentage points to wholesale inflation in manufacturing last November, raising it to 30%.

However, even some economists who don’t blame greed inflation for last year’s price hikes say they believe governments should try to constrain the market power of monopolies, perhaps by preventing mergers that reduce competition. The idea is that more companies competing for the same customers will encourage innovation and make the economy more productive.

However, tougher antitrust policies are unlikely to slow inflation anytime soon.

“I find it helpful to think of competition like diet and exercise,” said Conlon of New York University. “More competition is good. But, like diet and exercise, the gains are long-term.

“Now, the patient is in the emergency room. Sure, diet and exercise are still a good thing. But we need to address the acute problem of hyperinflation.”


Christopher Rogaber, an economics writer for the Associated Press contributed to this report.