Macroeconomists fiercely debate the causes of inflation now and how policymakers should respond. Profits as a driver of inflation is an especially contentious claim.
We need more macro economists like you that support isabella weber calling out sellers inflation. With that being said, inflation is a complicated dilemma with many factors (including the fed rate hikes) being involved. It's also important to recognize the importance of congress and yes they certainly are capable of doing more but with DC being so divided and a 2024 presidential election coming up I don't see it happening. Inflation is on the way down but we've got work to do still. The labor market has been resilient as I've said before, the Phillips curve is no more and there is no need to attack the middle class just to get down inflation. They deserve better.
Great post. I was thinking about Jeffery Sachs' idea that the economy is controlled by W.H.O.M. WHOM rules America, so to speak .Wallstreet, Health care companies Oil companies and the Military Industrial Complex. Maybe WHOM kick started inflation ,a WHOM- price spiral. Also the wage -price spiral no longer happens because we shipped so much production to Asia and destroyed unions in the private sector.
Maybe it's time to model inflation at the level of individual firms, using the underlying CPS data (after jumping through the necessary privacy hoops at the BLS). We've had an interesting period of disinflation since summer 2022 co-existing with flat unemployment.
I found it interesting that Jerome Powell mentioned the profit notion during his FOMC meeting and also discussed lack of competition due to supply issues. That actually influenced my article last week. Basically, he's suggesting some type of link/causality but didn't specify how exactly supply issues/lack of competition would lead to higher profits. I was wondering if there is a supply issue, most of our models would assume that everyone gets an equal amount of the intermediate good (just reduced proportionally). However, what if a few companies only are able to get the good (reputation, long term contracts etc). All of a sudden they might be the only final good producers, and have a temporary monopoly/oligopoly. This gives them pricing power.
Not sure how credible this ideas is but something I was considering based on Jerome Powell's statement.
You are too kind. "The price-price spiral is real" and "profit margins had increased notably." So does not this define rent extraction due to imperfect markets due to years of supplier consolidation. You are very right, this is not in the Fed's remit. I think you could lean heavier on federal responsibility to restrain monopolies, oligopolies, and cartels or at least expedite excess profits taxes. I understand we can all agree that the later are highly unlikely to be possible due to the power of the business lobby over government policy. What next?
I don't know if this makes sense, but how do corporate profits look on an inflation-adjusted basis? Would looking at it like that help ferret out whether their profits are high because of inflation or inflation is high because of their profits?
That's tricky because they set the prices, which would directly affect profits. Also, I am not an expert on profit-driven inflation. Most of the people I linked to are.
If a boat has 2 big holes inflating the water level, and one of them is due to corporate price gouging, how does one make an inflation adjustment for this?
The Phillips curve is one of those useful academic concepts that has reached its sell by date. Good in the ivory tower, terrible in making policy. See also efficient market hypothesis, rational expectations and r*.
Sellers inflation is real, but it is only a small fraction of the problem and it is likely unspooling as we write. With the benefit of hindsight it is apparent that about 2/3-3/4 of the recent boutique of inflation was supply driven due to covid and Ukraine Russia war supply chain disruption. Another way to state sellers inflation has been characterized as price over volume strategies bragged about by many corporate management's. The problem is caused by reduced market competition. In some cases that is oligopilistic behavior by large companies. Another factor is monopolies or near monopolies created by technological innovation and change. Nvidia is a recent example in chip as are weight loss drugs with Eli Lilly and Novo nordisk.. But the innovation is worth it due to productivity and health benefits unleashed. Given time other chip makers will catch up and tgere will be other weight loss drugs too.Tesla had a near monopoly on EVs. It took competitors awhile but clearly their advantage is rapidly eroding and we can see that in their recent price cutti⁸ng. It is important to distinguish between the Pepsi and natural gas cases and Nvidia and weight loss glp1 cases. There are other cases related to changes in market structural changes but I will spare readers and stop here.
Who would imagine corporate profits as a percentage of GDP jumped a full point since the beginning of the Pandemic while labour share hardly changed? Price-price spiral is serious and real. While commodity prices are driven by supply and demand and fluctuate, core products such as food, and restaurants bills and services such as health care only go up, hurting the ordinary public.
The states got 745 billion. I didn’t want to suggest that they should have gotten zero. What I am saying is that every group got too much. And this is why we have inflation. We had more demand then there was supply of goods.
I'm not an Econ Professor but I don't think one needs to be to recognize "Inflation reached its highest level in forty years, as well as an all-time high in profit margins"
Great article. The profit contribution to inflation is right on. However the fiscal stimulus is the real culprit. The pandemic caused supply chain disruptions but we flooded most consumers with 2 things. Time and money. I would argue that this caused the spiral that caused inflation with companies taking advantage of this. Thus excess profit helped drive the inflation. That’s what companies do. I am not saying that we shouldn’t have done stimulus but we did way too much and lots of individuals and companies that didn’t need it got it. Let’s hope there is not a next time. But we should study what we did wrong and do a more targeted stimulus if it’s ever needed again.
I know plenty of people who own companies that received stimulus payments that didn’t need it. Flooding the economy with cash when there are less goods is an inflation accident that didn’t wait but happened. So my point is there were people who needed the stimulus but plenty didn’t. If you imply that everyone was entitled then what you are going to get is what we have now. Don’t get me started on money giving too much to the States. All of this money led us to the inflation we have now.
The Fed balance sheet in 2008 about 1 Trillion, currently just under 9 trillion. A few hundred billion to the states that can't issue currency doesn't seem too outlandish, other than much state funding went to campaign donors or their puppet masters.
It's a No-Brainer that 70% of the economy is services, so if one directs federal spending to the bottom 70% who don't spend their disposable income on luxury goods/services, many jobs will result.
A Luxury Tax is urgently needed.
If China consumed resources at the same rate as the US, the US and China would consume ALL the worlds resources.
If we would simply (1) measure CPI inflation in the "harmonized" way the Europeans do, by excluding 25% of the index now devoted to "Owners' Equivalent Rent" from 12-18 months ago, and then (2) also exclude May and June 2022 from the rote 12-month YoY average, then (3) average HICP inflation over the past ten month was 0.7%.
We don't need more theories to explain bad data. We need to fix a uniquely American data lag problem in only the CPI and PCE measures of inflation that is not present in the PPI, HICP or "CPI less rent" indexes. Those inflation measures all averaged below 1% annual rates from July 2022 to April 2023.
All these so-called economic mathematical formulas are geared toward the wealthy or ruling elite, so it's not surprising that these so-called tools indicate so-called solutions that benefit these same wealthy folks.
Price-price spirals turn conventional policy advice about inflation on its head. The Fed should not go it alone; it should calm down some because it can’t fix profit-driven inflation. At the same time, it could needlessly weaken the economy and cause a recession. Fiscal policymakers have a crucial role in the fight against inflation.
This looks to me like the right policy, but for the wrong reasons. I do not think fiscal policy makers (eve if they could) look around at what the Fed is doing and inflation and say "We feel sorry for poor Jay, having to fight inflation all by himself and maybe, because of the swinging too hard. Let's raise some taxes to help him out." Rather the should be thinking that full employment is the time to reduce deficits.
Very interesting! However, I think profit driven inflation is still due to supply chains. While working for a consulting firm, I heard our clients were spending more resources on getting products on shelves rather than studying consumer demand. As a company has less products to sell, it raises prices and profits margins to make for lost volume. Fed can’t solve supply chain issues. Businesses need capital to reconstruct supply chains.
Supply disruptions are a larger contributor to inflation in my mind. However, I find the work on profits compelling. Also, if a price-price spiral happens only in crises, then the two interact.
Good point. Supposedly, price should come down given equilibrium, as markets penalize price gauging in the long run. The assumption is that all players (big or small) have enough access to supply of products, so they can lower profits margins.
Don’t know about Japan, China’s real estate has gone up several times in the past thirty years. There are serious inflations going on. You just don’t hear on the news, as there is no free press in China.
We need more macro economists like you that support isabella weber calling out sellers inflation. With that being said, inflation is a complicated dilemma with many factors (including the fed rate hikes) being involved. It's also important to recognize the importance of congress and yes they certainly are capable of doing more but with DC being so divided and a 2024 presidential election coming up I don't see it happening. Inflation is on the way down but we've got work to do still. The labor market has been resilient as I've said before, the Phillips curve is no more and there is no need to attack the middle class just to get down inflation. They deserve better.
Great post. I was thinking about Jeffery Sachs' idea that the economy is controlled by W.H.O.M. WHOM rules America, so to speak .Wallstreet, Health care companies Oil companies and the Military Industrial Complex. Maybe WHOM kick started inflation ,a WHOM- price spiral. Also the wage -price spiral no longer happens because we shipped so much production to Asia and destroyed unions in the private sector.
Maybe it's time to model inflation at the level of individual firms, using the underlying CPS data (after jumping through the necessary privacy hoops at the BLS). We've had an interesting period of disinflation since summer 2022 co-existing with flat unemployment.
I found it interesting that Jerome Powell mentioned the profit notion during his FOMC meeting and also discussed lack of competition due to supply issues. That actually influenced my article last week. Basically, he's suggesting some type of link/causality but didn't specify how exactly supply issues/lack of competition would lead to higher profits. I was wondering if there is a supply issue, most of our models would assume that everyone gets an equal amount of the intermediate good (just reduced proportionally). However, what if a few companies only are able to get the good (reputation, long term contracts etc). All of a sudden they might be the only final good producers, and have a temporary monopoly/oligopoly. This gives them pricing power.
Not sure how credible this ideas is but something I was considering based on Jerome Powell's statement.
See my recent post https://stayathomemacro.substack.com/p/is-the-fed-data-driven-or-data-ridden for a discussion of Powell on profits.
As you all know, even a broken clock is correct twice each day.
You are too kind. "The price-price spiral is real" and "profit margins had increased notably." So does not this define rent extraction due to imperfect markets due to years of supplier consolidation. You are very right, this is not in the Fed's remit. I think you could lean heavier on federal responsibility to restrain monopolies, oligopolies, and cartels or at least expedite excess profits taxes. I understand we can all agree that the later are highly unlikely to be possible due to the power of the business lobby over government policy. What next?
I do the best I can. Plus, I referenced experts on the topic. I would suggest Groundwork's analysis.
I don't know if this makes sense, but how do corporate profits look on an inflation-adjusted basis? Would looking at it like that help ferret out whether their profits are high because of inflation or inflation is high because of their profits?
That's tricky because they set the prices, which would directly affect profits. Also, I am not an expert on profit-driven inflation. Most of the people I linked to are.
If a boat has 2 big holes inflating the water level, and one of them is due to corporate price gouging, how does one make an inflation adjustment for this?
This is the worst analogy I've ever heard, sorry :/
The worst? :)
With no instruments that could affect margins in the short run, I do not see the importance of margins for monetary policy.
If you want to look for a wage - price spiral, look at expectations. You will not find one. TIPS traders expect inflation to _undershoot_ targets.
The Phillips curve is one of those useful academic concepts that has reached its sell by date. Good in the ivory tower, terrible in making policy. See also efficient market hypothesis, rational expectations and r*.
Sellers inflation is real, but it is only a small fraction of the problem and it is likely unspooling as we write. With the benefit of hindsight it is apparent that about 2/3-3/4 of the recent boutique of inflation was supply driven due to covid and Ukraine Russia war supply chain disruption. Another way to state sellers inflation has been characterized as price over volume strategies bragged about by many corporate management's. The problem is caused by reduced market competition. In some cases that is oligopilistic behavior by large companies. Another factor is monopolies or near monopolies created by technological innovation and change. Nvidia is a recent example in chip as are weight loss drugs with Eli Lilly and Novo nordisk.. But the innovation is worth it due to productivity and health benefits unleashed. Given time other chip makers will catch up and tgere will be other weight loss drugs too.Tesla had a near monopoly on EVs. It took competitors awhile but clearly their advantage is rapidly eroding and we can see that in their recent price cutti⁸ng. It is important to distinguish between the Pepsi and natural gas cases and Nvidia and weight loss glp1 cases. There are other cases related to changes in market structural changes but I will spare readers and stop here.
Who would imagine corporate profits as a percentage of GDP jumped a full point since the beginning of the Pandemic while labour share hardly changed? Price-price spiral is serious and real. While commodity prices are driven by supply and demand and fluctuate, core products such as food, and restaurants bills and services such as health care only go up, hurting the ordinary public.
The states got 745 billion. I didn’t want to suggest that they should have gotten zero. What I am saying is that every group got too much. And this is why we have inflation. We had more demand then there was supply of goods.
I'm not an Econ Professor but I don't think one needs to be to recognize "Inflation reached its highest level in forty years, as well as an all-time high in profit margins"
Great article. The profit contribution to inflation is right on. However the fiscal stimulus is the real culprit. The pandemic caused supply chain disruptions but we flooded most consumers with 2 things. Time and money. I would argue that this caused the spiral that caused inflation with companies taking advantage of this. Thus excess profit helped drive the inflation. That’s what companies do. I am not saying that we shouldn’t have done stimulus but we did way too much and lots of individuals and companies that didn’t need it got it. Let’s hope there is not a next time. But we should study what we did wrong and do a more targeted stimulus if it’s ever needed again.
Who received most of the fiscal stimulus, 'we the people' or the United Corporations of America?
I know plenty of people who own companies that received stimulus payments that didn’t need it. Flooding the economy with cash when there are less goods is an inflation accident that didn’t wait but happened. So my point is there were people who needed the stimulus but plenty didn’t. If you imply that everyone was entitled then what you are going to get is what we have now. Don’t get me started on money giving too much to the States. All of this money led us to the inflation we have now.
The Fed balance sheet in 2008 about 1 Trillion, currently just under 9 trillion. A few hundred billion to the states that can't issue currency doesn't seem too outlandish, other than much state funding went to campaign donors or their puppet masters.
It's a No-Brainer that 70% of the economy is services, so if one directs federal spending to the bottom 70% who don't spend their disposable income on luxury goods/services, many jobs will result.
A Luxury Tax is urgently needed.
If China consumed resources at the same rate as the US, the US and China would consume ALL the worlds resources.
If we would simply (1) measure CPI inflation in the "harmonized" way the Europeans do, by excluding 25% of the index now devoted to "Owners' Equivalent Rent" from 12-18 months ago, and then (2) also exclude May and June 2022 from the rote 12-month YoY average, then (3) average HICP inflation over the past ten month was 0.7%.
We don't need more theories to explain bad data. We need to fix a uniquely American data lag problem in only the CPI and PCE measures of inflation that is not present in the PPI, HICP or "CPI less rent" indexes. Those inflation measures all averaged below 1% annual rates from July 2022 to April 2023.
https://twitter.com/AlanReynoldsEcn/status/1658186942192705582
Yes, shelter lags a year or more. The shelter is a massive portion of the CPI inflation. The rent prices from last year are starting to come in. Good!
I'm regularly distracted by the trees, instead of looking at the forest.
All these so-called economic mathematical formulas are geared toward the wealthy or ruling elite, so it's not surprising that these so-called tools indicate so-called solutions that benefit these same wealthy folks.
Data lag is the problem vs record corporate profits? Really?
How about China, Japan & the island of Taiwan ?
Price-price spirals turn conventional policy advice about inflation on its head. The Fed should not go it alone; it should calm down some because it can’t fix profit-driven inflation. At the same time, it could needlessly weaken the economy and cause a recession. Fiscal policymakers have a crucial role in the fight against inflation.
This looks to me like the right policy, but for the wrong reasons. I do not think fiscal policy makers (eve if they could) look around at what the Fed is doing and inflation and say "We feel sorry for poor Jay, having to fight inflation all by himself and maybe, because of the swinging too hard. Let's raise some taxes to help him out." Rather the should be thinking that full employment is the time to reduce deficits.
The Fed should and has raise rates when demand is high. My point is that Congress and the White House should contribute too.
Contribute how?
Very interesting! However, I think profit driven inflation is still due to supply chains. While working for a consulting firm, I heard our clients were spending more resources on getting products on shelves rather than studying consumer demand. As a company has less products to sell, it raises prices and profits margins to make for lost volume. Fed can’t solve supply chain issues. Businesses need capital to reconstruct supply chains.
Supply disruptions are a larger contributor to inflation in my mind. However, I find the work on profits compelling. Also, if a price-price spiral happens only in crises, then the two interact.
Good point. Supposedly, price should come down given equilibrium, as markets penalize price gauging in the long run. The assumption is that all players (big or small) have enough access to supply of products, so they can lower profits margins.
China and Japan had supply-chain issues without excessive inflation.
Don’t know about Japan, China’s real estate has gone up several times in the past thirty years. There are serious inflations going on. You just don’t hear on the news, as there is no free press in China.