35 Comments
May 15, 2023Liked by Claudia Sahm

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.

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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.

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May 16, 2023Liked by Claudia Sahm

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.

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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.

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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?

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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?

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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.

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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.

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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"

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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.

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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

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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.

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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.

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