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Everyone agrees that inflation is happening. What they don’t agree on is whodunit.
The most recent figures show prices are up 7.7% from 2021. But for some items like eggs, health insurance and gasoline, prices have risen much faster than that.
Inflation can be an elusive enemy: quietly running away with our savings and bits of our paychecks, and stealing everything from vacations to favorite foods.
But who let this thief run amok on the American economy? What is the source of inflation? Let’s look at the clues and potential culprits.
The main suspects
The main suspects differ according to the parties. Many right-wing economists and politicians argue that inflation was caused by government spending and various aid programs (stimulus checks, student debt forgiveness, Biden in the White House with public money).
Many left-wing economists and politicians point the finger at the war in Ukraine (for driving up oil prices, which affect almost everything else), as well as greedy corporations, many of whom, despite stories of supply chain issues and rising costs, have generated record profits. (Businesses, in aisle 4, with the prize gun).
The smoking gun
As in any good mystery, we look at our clues. In the case of corporate greed, there are some pretty compelling ones.
First, corporate profits: they have reached a record high this year. Many companies have seen their profits hit record highs.
This, of course, raises some eyebrows. If companies are so struggling with costs and supply chains, where are all those billions in profits coming from?
It’s starting to look like all those companies crying over rising costs could be a case of crocodile tears, as companies raise prices for all of us.
Rakeen Mabud is chief economist for the progressive think tank Groundwork Collaborative. “Companies are taking a spoonful of sugar off the backs of families who are all really struggling to get by,” she said.
Mabud has been on dozens of company earnings calls and says she often hears CEOs bragging about how much they’ve been able to raise prices.
Grocery giant Kroger has made billions in profits over the past two years. On a recent call with investors, Mabud heard CEO Rodney McMullen say, “We consider a little inflation is always good in our business and we expect to be able to pass it on.”
AutoZone, which sells auto parts and accessories, saw profits jump 13%. Chief Financial Officer Jamere Jackson called inflation “a bit of our friend in terms of what we see in terms of retail prices.”
Hostess has seen its profits jump more than 15% this year. CEO Andrew Callahan said: “We also see that consumers are experiencing a lot of disruption and they haven’t fully recognized or absorbed pricing.”
And you Twinkie?
Murder on the Express Contest
In addition to corporate lawsuits, there is much of the consolidation that we have seen in corporate America over the past 40 years.
Example: There are four companies in the United States that control about 80% of the beef and poultry market.
This type of consolidation can mean that companies don’t have to compete as much for our business and there is less pressure to keep prices low.
Meat companies have settled price-fixing lawsuits this year alone and a proposed merger between grocery giants Kroger and Albertson has raised fears it could drive up prices for many consumers.
Of course every suspect needs an alibi and in the case of inflation, societies have quite strong ones.
On the one hand, companies have really seen their costs increase.
Commodity prices have been rising all year. They rose at about the same rate as the prices we paid in stores.
Actually a little more. Wholesale prices (the cost of raw materials companies buy to make the products they sell to us) are up more than 8% from a year ago, compared to consumer prices, which have risen 7.7% compared to last year.
This is compelling evidence that much of the higher prices we pay in store are just the higher cost of raw materials passed down from manufacturers and retailers.
University of Michigan economist Justin Wolfers says corporate greed is a red herring and that corporations are not the source of inflation.
“My friend and economist Jason Furman says, ‘Blaming inflation on greed is like blaming gravity on a plane crash,’” says Wolfers. “It’s technically correct, but it completely misses the point.”
Wolfers says companies always try to charge as much as they can. In fact, the only reason we don’t all pay $800 for a pair of socks or a cheeseburger is simply because of greed in another form: competition.
“That greed forces them to offer low prices because they’re trying to beef up their competitor,” says Wolfers.
So what has changed?
So why are prices rising now? It is clear that something has changed.
Wolfers says most businesses have two main expenses: raw materials and worker wages. Raw materials have become much more expensive, as we have seen.
Salaries, however, are another story.
So far this year, wages have risen about 5% compared to prices, which have risen 7.7%.
Companies do not raise wages as fast as they raise prices. Wolfers thinks the lag is the source of some of those corporate profits.
“Most economists are a little puzzled that wages haven’t followed a bit more,” Wolfers says. And it’s confusing. After all, workers have more power today than they have for decades. Why don’t they negotiate more?
Wolfers suspects they are, in fact, negotiating, but not always for more money. It could be for the ability to work remotely instead.
For many workers, flexibility and other benefits have been more valuable than money, so companies have been able to get away with offering lower wages, even at a time when they are competing for jobs. workers.
A crime of opportunity
Still, Wolfers thinks below-price wages won’t last long.
With prices rising at the same time unemployment is low and many companies are competing to hire, workers are likely to push for higher pay. And companies will likely have to pay to retain and attract talent.
As soon as companies start paying more in wages, those record profits that CEOs are bragging about will likely go into workers’ paychecks.
“What happens in the meantime is that there is some money that we hope should go to the workers,” says Wolfers. “But it stays in the boss’s pocket instead.”
Wolfers predicts corporate profits will begin to return to normal levels as wages rise. But the prices?
And the killer is…
It turns out that consumers might be the culprits of the inflation mystery. We at least helped and encouraged. “Inflation comes from demand,” says Wolfers.
Despite inflation, demand has not really waned. The companies raised the prices and we paid them. In fact, in many sectors of the economy, spending has increased along with prices.
However, we don’t necessarily buy more because we have more money. Our collective savings have declined and household debt has increased. We may be spending money that we don’t need to meet rising prices.
It’s probably not sustainable. And when our buying slows down, Wolfers says companies will start lowering prices to get us to buy: prices will fall and inflation will come down. But, until demand drops, companies will push prices up as much as they can. It’s elementary.
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