Fed should make clear that rising profit margins are spurring inflation
ft.com
ft.com
A fairer interpretation of the situation is there is a lot of money chasing less goods. That results in, simultaneously, high inflation and reduced living standards. High profit margins aren't causing inflation - there have to be people able to pay the prices for raising them it to make sense.
Plus, the writer of the piece appears to work in wealth management. He's going to lose a lot of money if the fed doesn't drop rates back to 0. The author has a very strong incentive to argue as he does.
Companies can complain about a worker shortage all they want; if they want to fix it, they need to realize they have a salary shortage.
Inflation can be caused by economic success where everybody is richer, and businesses have an incentive to increase prices and salaries to compete with other businesses doing the same.
But this isn't what we're dealing with. This inflation hasn't been caused by economic success, it's been caused by quantitative easing - money printing. And lots of it. Prices are going up because there is more money for the same (or less) amount of goods. In my opinion it may be more helpful to think about 'currency devaluation' rather than 'price increases', despite the fact these are two sides of the same coin.
It speculates about reasons why companies have increased prices faster than their input costs have risen:
"The resulting resilience in demand has given companies the confidence to raise prices faster than costs.
In addition, the power of storytelling has conditioned consumers to accept price rises. Imagine a story about a farmer who takes wheat to the windmill, where it is ground into flour, and then baked into bread. In that fantasy world, a rise in the cost of wheat of say 22 per cent might be used to justify a 15 per cent rise in the price of bread."
The argument is neither complete nor convincing. Unless there's some bread cartel/oligopoly, a bread seller can't just increase prices and use a story to convince people it's unavoidable.
>Below are key findings from the staff analysis:
> ...
>Certain corporations are using the cover of inflation to raise prices excessively, resulting in record profits and profit margins.
Is this a bad thing? The paragraph later goes list examples which were shipping, rental car, meat processing, and oil and gas. All of them experienced some supply/demand imbalance (ie. too little supply or too much demand). In that sort of situation, isn't it better to let prices go up until supply meets demand, rather than leaving prices as it is? Sure, paying higher prices suck, but if demand outstrips supply you'll have shortages. During the pandemic we saw this happen with GPUs and game consoles, because OEMs were reluctant to hike prices and/or institute an auction system. They avoided a PR backlash from it and were able to channel the hate towards "scalpers", but the situation for the consumer wasn't really any better. I doubt consumers would want empty shelves at the butcher, for instance.
Very different early education can make a huge difference. But when you start out decades ago with a bunch of inept adults making an angry mess of their country, you get as you describe.
Stop living in your memory as if it’s physical law and not the result of shit leadership.
They can. Where else are you going to go? Due to lockdown the excess supply capacity that allows everybody in aggregate to leave supplier A and go to supplier B isn't there. Supplier B can't supply everybody and people don't want to or can't go without. Therefore Supplier A will sell their output at whatever price they decide.
For competition to work the turnover curve on the price/sales volume graph has to be leptokurtic. It isn't at present. Price can be pushed way up before volume is affected.
Which doesn’t explain why other countries, where the government didn’t dump a shitload of cash, are seeing even higher price increases than the U.S.
Also, what’s the mechanism for govt dumping shit load of cash allowing prices to go up? The usual suspects point to the fall in the value of the dollar, but the dollar is historically strong at the moment. Another mechanism could be a massive increase in demand, but that would be accompanied by a corresponding massive rise in GDP.
Wheat is a global commodity, and the Chicago price is what the world works off of.
> but the dollar is historically strong at the moment.
As compared to what? It is historically weak compared to wheat, but presumably you mean compared to other currencies? Global transactions largely take place in USD, oil in particular, and the increase in monetary supply ended up in the hands of Americans first, so they have more of it to spend while the rest of the world does not, leaving those holding other currencies trying to buy up more USD all while Americans are trying to hold onto it over inflation fears.
That demand is inelastic in itself shouldn't necessarily allow price increases.
This is trivially provable false. Companies can charge inflated prices based on story and/or advertising. The entire existence of high end fashion, for example, owes its existence to this being true.
But even setting that aside, the primary driver of inflation, oil and gas prices, are set by a literal cartel. And what do you know, the companies in this industry are making record profits.
...funny you should use bread as your example....
https://en.wikipedia.org/wiki/Bread_price-fixing_in_Canada
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The senior officers of Canada Bread, since 23 May 2014 a Grupo Bimbo subsidiary,[6] and Weston Foods, now a sister company to Loblaws under parent George Weston Limited, colluded to boost bread prices, and later strong-armed retailers to increase their prices in tandem.[5] The two named companies became aware of the investigation on 31 October 2017, and decided to co-operate with investigators in December in exchange for receiving immunity from prosecution.[5]
A statement issued by Canada Bread noted that the George Weston and Loblaw informants admitted to inappropriate conduct and accused "certain former Canada Bread executives" dating back to 2001 "while Canada Bread was under previous ownership."[5]
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- the firm asks for more money - people pay the price
That requires people with money prepared to pay the price and a lack of effective competition from other suppliers for that money.
Which this all shows is that firms mark up costs and try and get as much for their output as possible. What keeps prices down is that people can usually go elsewhere because there is excess capacity to supply. We lack supply capacity at present.
Inflation is therefore down to a lack of competition. The solution to that is to encourage more firms to start up, break up existing monopolies or forcibly create some.
sigh
I can't tell whether this is serious. If I'm reading this right, the author is saying that today's inflation has not been associated with real wage growth, and is in contrast to the last bout of inflation (ie. the 1970s) which was associated with real wage growth. However, the author also adds "apart from the wage and price control debacle of Richard Nixon’s presidency". In other words, 1970s inflation was associated with wage growth, except the parts where it wasn't associated with wage growth. Well obviously if you hand wave away the data that don't fit your narrative of course you're going to find evidence that you want.
I browsed fred.stlouisfed.org to find some statistics[1][2] to independently evaluate the author's claim. The best I could come up with for wage growth was "Real Median Family Income in the United States". Looking at the two graphs[3], I can't really say the claim is true. It's true that real income ended the inflationary era of 70s/80s higher than it started, but there were also several dips (ie. the parts the author tried to hand wave away). Given that we're only less than a year into this inflationary ear, it seems premature to conclude This Time Is Different.
The only other piece of the data author presents is data from the hotel industry, but given how narrow it is it seems cherrypicked.
[1] https://fred.stlouisfed.org/series/MEFAINUSA672N
I'm glad you're signing up to do so, because it's unclear to me that stimulus checks are still the reason that consumption is at an ATH and inflation is elevated.
And you can't really blame loose money either...
And the best part is when they tell employers to not raise wages because it makes inflation worse.
Because money is relatively tight again and we are still seeing inflation.
OR are there other factors potentially at play?
In 2008 the massive expansion of the money supply did little to spur inflation because: a) banks were skittish and increased their reserves significantly which tied up extra money and b) consumers worked to pay down debt and increase savings.
I don’t deny that supply shocks can trigger inflation, but without excess money supply the effect is limited.
Since 1970, only supply shocks have caused inflation so idk why you’re so confident that it wasn’t the case this time.
Volker doing what he did while oil prices tanked really fucked with the economic understanding of a whole generation of people.
Like, you’re literally saying “hey, the occurrence of X in 2008 doesn't count, and when we did X again in 2020 with Y that’s when X really mattered, but yeah Y is marginal. Also ignore that when Y happened without X in the 70s it happened too.”
Saying profifs are causing inflation is the biggest gas lighting I've ever heard from the biden administration
Your argument is supply has nothing to do with inflation? If the Russians stop supplying europe with gas the energy prices will stay the same?
You're conflating the price of a good that is going up, becoming more valuable against the currency, known as scarcity, to inflation, or expansion of the money supply. Regardless if that scarcity is deliberately manufactured. It's comparing apples and oranges.
You cannot do this because Oil and gas are not a measures of wealth. It's backwards to use them as such. We use money as a measure of wealth.
Inflation was going up well before the Russian invasion and sanctions. So I believe the covid stimulus, i.e literally money printing to be the main driver of it, and exacerbated further by supply shocks. Otherwise I would expect to see Core CPI come down.
In this scenario, if no one increase prices, either something will go out of stock or we need to have enough supply to meet maximum possible demand. I think companies are increasing prices because it is easier than increasing supply. If demand is shown to be persistent they will increase supplies too. This is similar to chip shortage we had. First prices increased, now they are trying to increase fab capacity. No need to invest in manufacturing capacity if this extra demand is just an anomaly which will disappear soon. Reducing prices later is much easier in this scenario.
I recognize people without means are squeezed in all of this but I also don’t see any easy solution.
Why weren't you selling at X+15 yesterday, and why aren't you selling it at X+50 today? Did you just wake up this morning feeling greedier than usual (but not too greedy), or could it be that there is some external constraint on your ability to set prices, and that constraint has changed?
Uh, the price is going up because the demand is there at that price. I’m seeing this first hand - customers mad for being turned away and others mad at the price increases.
I wish govt would work on the supply side for once. I don’t need lower input prices - but less hassles around for example adding three out of state employees would be fantastic