Greed: Is Raising Corporate Prices Fueling Inflation? Experts weigh in – National

Enraged at the rising prices at the gas station and supermarket, many consumers feel they know exactly where to blame: on greedy companies that relentlessly drive up prices and reap the profits.

In response to that sentiment, the Democrat-led House of Representatives last month passed a party vote — most Democrats in favor, all Republicans against — a bill aimed at tackling alleged price hikes by energy producers.

Similarly, Britain last month announced plans to levy a temporary 25 percent windfall tax on the profits of oil and gas companies and funnel the proceeds to financially struggling households.

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But despite public resentment, most economists say that corporate price inflation is at most one of the many causes of runaway inflation — not the main one.

“There are much more plausible candidates for what’s going on,” said Jose Azar, an economist at the Spanish University of Navarra.

These include: Robust consumer spending. Supply disruptions in factories, ports and freight yards. Worker shortages. President Joe Biden’s Huge Pandemic Aid Tool. Closures in China caused by COVID 19. Russia’s invasion of Ukraine. And, last but not least, a Federal Reserve that kept interest rates ultra-low for longer than experts say it should.

In any case, the blame game is intensifying after the US government reported inflation was 8.6 percent in May from a year earlier, the biggest price spike since 1981.

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In order to fight inflation, the Fed is now slowing down and aggressively tightening lending.

On June 15, it raised its short-term benchmark by three-quarters of a point — the largest increase since 1994 — and signaled that more major rate hikes are on the way. The Fed hopes to achieve a notoriously difficult “soft landing” — slowing growth enough to curb inflation without the economy sliding into recession.

For years, inflation had remained at or below the Fed’s annual target of 2 percent, even as unemployment plunged to a half-century low. But as the economy recovered from the pandemic recession with astonishing speed and strength, the U.S. consumer price index rose steadily — from a 2.6 percent year-on-year increase in March 2021 to its four-decade high last month.

For a while – before profit margins at S&P 500 companies declined early this year – the rise in inflation has coincided with rising corporate profits.

It was easy for consumers to connect the dots: companies, it seemed, were pushing prices up. This wasn’t just inflation. It was greed.

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Asked to name the culprits behind the spike in gasoline prices, 72 or Biden (58. And the verdict was twofold: 86 percent of Democrats and 52 percent of Republicans blamed the companies for excessive gas prices.

“It’s very natural for consumers to see prices go up 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. , which studies corporate competition.

“You and I are not allowed to set prices at the supermarket, the gas station or the car dealer. So of course people are blaming the companies because they see them raising prices.”

Yet Conlon and many other economists are reluctant to sue or punish corporate America. When the University of Chicago Booth School of Business asked economists this month whether they would support a law banning large companies from selling their goods or services at an “unreasonably high price” during a market shock, 65 percent said no. Only 5 percent supported the idea.

Which combination of factors is most responsible for pushing prices up “is still an open question,” economist Azar admits. COVID-19 and its aftermath have made it difficult to assess the state of the economy. Today’s economists have no experience analyzing the financial aftermath of a pandemic.

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Policymakers and analysts have been repeatedly blinded by the path the economy has taken since COVID hit in March 2020: They hadn’t anticipated the rapid recovery from the downturn fueled by massive government spending and record-low interest rates set by the Fed and other central banks.

Thereafter, they were slow to recognize the mounting threat of high inflationary pressures, initially dismissing it as only a temporary consequence of supply disruptions.

One aspect of the economy, however, is undisputed: A wave of mergers in recent decades has killed or reduced competition between airlines, banks, meat-packing companies and many other industries.

That consolidation has given the remaining companies the leverage to demand price cuts from suppliers, keep workers’ wages low and pass on higher costs to customers who have little choice but to pay.

Researchers at the Federal Reserve Bank of Boston found that less competition made it easier for companies to pass higher costs on to customers, calling it a “amplifying factor” in the inflation revival.

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Josh Bivens, director of research at the liberal Economic Policy Institute, estimates that nearly 54 percent of price increases in non-financial firms since mid-2020 can be attributed to “higher profit margins,” compared to just 11 percent from 1979 to 2019.

Bivens admitted that neither corporate greed nor market influence has increased significantly in the past two years. But he suggested that during the COVID inflationary spike, companies have adapted the way they use their market power: many have moved away from pressuring suppliers to cut costs and curtail workers’ wages and instead lowered prices for customers increased.

In a survey of nearly 3,700 companies published last week, the left-wing Roosevelt Institute concluded that markups and profit margins hit their highest levels last year since the 1950s.

It also found that companies that had aggressively increased prices before the pandemic were more likely to do so after it hit, “suggesting that market power may play a role as an explanatory driver of inflation.”

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Economic expert says federal government plan announcement won’t help inflation

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Yet many economists are not convinced that corporate greed is the main culprit. Jason Furman, a top economic adviser in the Obama White House, said there is even evidence that monopolies are slower than firms that face fierce competition to raise prices when their own costs rise, “partly because their prices increase in the beginning.” were high.”

Similarly, NYU’s Conlon cites examples where prices have risen in competitive markets. Used cars, for example, are sold on lots throughout the country and by numerous private individuals.

Still, average used car prices have skyrocketed by 16 percent over the past year. Similarly, the average price of large devices, another market with many competitors, rose nearly 10 percent last month from a year earlier.

In contrast, the price of alcoholic beverages is up only 4 percent from a year ago, although the beer market is dominated by AB-Inbev and spirits by Bacardi and Diageo.

“It’s hard to imagine AB-Inbev not being as greedy as Maytag,” Conlon said.

So what caused the inflation spike the most?

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

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Researchers at the Federal Reserve Bank of San Francisco estimate that government support to the economy during the pandemic, which put money in consumers’ pockets to help them weather the crisis and trigger a deluge of spending, is 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 blamed global supply chain bottlenecks for playing a “significant role” in driving up factory costs.

They found that in November last year, it added a whopping 20 percentage points to manufacturing wholesale inflation, up 30 percent.

Yet even some economists who don’t blame greed for last year’s price spike say they think governments should try to limit the market power of monopolies, perhaps by blocking mergers that reduce competition.

The idea is that more companies competing for the same customers would encourage innovation and make the economy more productive.

Still, stricter antitrust policies probably wouldn’t do much to slow inflation in the near term.

“I find it helpful to think about competition like diet and exercise,” said NYU’s Conlon. “More competition is a good thing. But, like diet and exercise, the payoffs are long-term.

“At the moment the patient is in the emergency room. Of course, diet and exercise are still a good thing. But we need to address the acute problem of inflation.”

© 2022 The Associated Press