My views on inflation continue to evolve: I was correct in spotting inflation in the mid-2000s; I was rightly skeptical of rising prices in the post-crash 2010s. Dynamic pricing during and after the pandemic seemed problematic but my expectation was that inflation would be resolved relatively quickly as supply chains reopened and life returned to normal. “transitory” turned out to be too optimistic, and I was wrong in my expectations for a rapid decline in the price delta.

I was wrong too.”Inflation” That error is the focus of today’s post.

for lack of a better phrase, Greed is inflation Occurs when companies take advantage of confusion and price volatility to drive through price increases. These are not due to higher input costs but rather the result of specific strategies used to generate higher profit margins.

Perhaps this partly explains why corporate profits have held up despite high interest rates and rising wages.

When I combined my list for inflation, corporate profit-seeking was number one (13 out of 15). Subsequent updates ( here , here , and here ) have led me to “wonder how much I underestimated Greed is inflation“That was June; we’ve collected more data since then. This strongly suggests that the capital side of the ledger is a more significant driver of price growth than previously believed.

If I were to create that list from scratch today, Inflation Definitely in the top 10 and probably in the top 5.

When the Economic Policy Institute analyzed it, they discovered:

“Due to the COVID-19 slowdown in the second quarter of 2020, overall prices in NFC [non-financial corps] The sector grew at an annual rate of 6.1% – a pronounced acceleration over the 1.8% price growth that characterized the pre-pandemic business cycle of 2007-2019. Surprisingly, more than half (53.9%) of this growth can be attributed to the fatter profit margins, with labor costs contributing less than 8% of this growth.”

Labor and capital have swapped roles in 2020s-era inflation: In the 4 decades preceding the pandemic (1979 to 2019), profits contributed 11% to price increases while labor costs added more than half – about 60%. Today, profits account for more than half of the price increase.

If corporate profit margins are indeed the driver of much inflation, this raises larger questions about current FOMC policy. Generally speaking, high-profit margins are not a sign of an overheated economy. Rather, it reflects management’s opportunistic behavior given the circumstances (that’s their job). I’ve previously argued ( here , here , here , and here ) that inflation has already peaked, but regardless, it’s not the pick-up in increased prices that is particularly susceptible to remedial FOMC rate hikes; Fed Chair Jerome Powell appears on track to kill inflation by crushing demand through a Fed-induced recession.

But recent data have called this approach into question. If 1) corporate profits are indeed the main driver of inflation, and; 2) This raises problems when Federal Reserve policy is unlikely to affect that source of inflation. Furthermore, increases in the cost of credit and capital do not encourage companies to reduce their profit margins; It probably has the opposite effect.

There is some good news: First, we have known for months that commodity and raw material prices are falling; As Bloomberg’s John Authors pointed out today, we now also see evidence of this in quarterly corporate conference calls:

And second, as Jude Legum pointed out today, Federal Reserve Vice Chairman Lyell Brainard admitted last month that “Returning retail margins to more normal levels could meaningfully help ease inflationary pressures in some consumer goods.

Conventional economic consensus held that inflation occurs when too many dollars chase too few goods. At that time the world had strong labor unions, limited globalization and new technological innovations. That world no longer exists.

If the Fed doesn’t figure this out soon, they’re going to do real damage to the US economy.

see more:
Corporate profits contributed disproportionately to inflation. (Economic Policy Institute, April 21, 2022)

Fed should clarify that rising profit margins are fueling inflation (FT, Nov 2, 2022)

The Truth About Inflation (Popular Facts, November 7, 2022)

Adding Reasons for Optimism on Inflation (Bloomberg, November 7, 2022)

Restoring Price Stability in an Uncertain Economic Environment (Vice Chair Lyell Brainard, Federal Reserve, October 10, 2022)

Private equity guys are trying to buy a supermarket chain before it sells it (Slate, Nov. 4, 2022)

in the past:
Behind the Curve, Part V (November 3, 2022)

When Your Only Tool Is a Hammer (November 1, 2022)

Why is the Fed always late to the party? (October 7, 2022)

Who’s to Blame for Inflation, 1-15 (June 28, 2022)

Has inflation peaked? (May 26, 2022)

Normalization vs Inflation (March 14, 2022)

Transit taking longer than expected (February 10, 2022)

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