WASHINGTON (AP) – Furious at rising gas station and supermarket prices, many consumers feel they know exactly where to blame: greedy companies that are ruthlessly raising prices and reaping profits.
In response to this sentiment, the House of Representatives-led House of Representatives passed a party vote last month – most Democrats in favor, all Republicans against – a bill designed to quell an alleged rise in energy prices.
Similarly, Britain last month announced plans to impose a temporary 25% contingency tax on oil and gas companies’ profits and direct revenues to financially disadvantaged households.
Yet, despite public outrage, most economists say corporate price increases are at most one of the many causes of rapid inflation – not the main one.
“There are much more plausible candidates for what is happening,” said Jose Hazard, an economist at the Spanish University of Navarre.
These include: Interruptions in deliveries to factories, ports and shipyards. Shortage of workers. The huge pandemic relief program for President Joe Biden. Caused by COVID 19 stops in China. Russia’s invasion of Ukraine. Last but not least, the Federal Reserve, which has kept interest rates extremely low for longer than experts say it should.
However, economists say that mostly rising costs on the part of consumers and governments have led to higher inflation.
The guilt game is intensifying, if nothing else, after the US government announced that inflation reached 8.6% in May compared to a year earlier, the biggest jump in prices since 1981.
To fight inflation, the Fed is now belatedly tightening loans aggressively. On June 15, it raised its reference short-term interest rate by three quarters of a point – its largest increase since 1994 – and signaled that large interest rate increases are yet to come. The Fed hopes to achieve the notoriously difficult “soft landing” – a slowdown in growth enough to curb inflation without causing the economy to slide into recession.
For years, inflation remained at or below the Fed’s annual target of 2%, even as unemployment fell to its lowest level in half a century. But as the economy recovered from the pandemic recession with astonishing speed and strength, the US consumer price index rose steadily, from a 2.6% annual increase in March 2021 to last month’s highest level in four decades.
At least for a while – before the profit margins of the S&P 500 companies fell earlier this year – the jump in inflation coincided with rising corporate profits. It was easy for consumers to connect the dots: companies seemed to be involved in raising prices. It was not just inflation. It was greed.
Asked to name the culprits behind the jump in gasoline prices, 72% of 1,055 Americans surveyed in late April and early May by the Washington Post and George Mason University’s Schar School of Politics and Management blame profit-seeking corporations more than lawsuits , who pointed to Russia’s war against Ukraine (69%) or Biden (58%) or the disturbances of the pandemic (58%). And the verdict was bipartisan: 86 percent of Democrats and 52 percent of Republicans blamed corporations for the high gas prices.
“It’s only natural for consumers to see prices rise and get angry about it, and then look for someone to blame,” said Christopher Conlon, an economist at the Stern School of Business at New York University who studies corporate competition. “You and I have no right to set prices in the supermarket, gas station or car dealership. So people naturally blame corporations because they see prices rising.
Yet Conlon and many other economists are reluctant to blame – or support the punishment – Corporate America. When the University of Chicago’s Booth School of Business asked economists this month if they would support a law banning large companies from selling their goods or services at “unknowingly excessive prices” during a market shock, 65 percent said no. Only 5% supported the idea.
Which combination of factors is most responsible for the price increase “is still an open question”, economist Azar admits. COVID-19 and its consequences made it difficult to assess the state of the economy. Today’s economists have no experience analyzing the financial consequences of a pandemic.
Politicians and analysts have repeatedly been blinded by the path the economy has taken since the COVID strike in March 2020: They did not expect a rapid recovery from the downturn fueled by huge government spending and record low interest rates set by the Fed and other central banks. . They then delayed recognizing the growing threat of high inflationary pressures, initially dismissing them only as a temporary consequence of supply disruptions.
However, one aspect of the economy is undeniable: a wave of mergers in recent decades has killed or reduced competition between airlines, banks, meat packaging companies and many other industries. This consolidation has given the surviving companies the leverage to demand a reduction in prices from suppliers, to withhold workers’ wages and to pass on higher costs to customers who have little choice but to pay.
Researchers at Boston’s Federal Reserve found that less competition made it easier for companies to pass on higher costs to customers, calling it a “boosting factor” for inflation.
Josh Beavons, research director at the Institute for Liberal Economic Policy, estimates that nearly 54 percent of price increases in nonfinancial corporations since mid-2020 may be due to “higher profit margins,” compared to just 11 percent. from 1979 to 2019
Bevens acknowledged that neither corporate greed nor market influence has likely grown significantly in the past two years. But he suggested that during COVID’s inflation jump, companies have shifted the way they use their market power: many have shied away from pressure from suppliers to cut costs and cut workers’ wages, and instead raised prices for customers.
In a survey of nearly 3,700 companies published last week, the Roosevelt Institute with leftist orientations concluded that markups and profit margins last year reached their highest level since the 1950s. He also found that companies that aggressively raised prices before the pandemic were more likely to do so after the strike, “assuming the role of market power as an explanatory driver of inflation.”
Yet many economists are not convinced that corporate greed is the main culprit. Jason Furman, a leading economic adviser to the Obama White House, said some evidence even suggests that monopolies are slower than companies facing stiff competition to raise prices when their own costs rise, “in part because their prices were high in the beginning. ”
Similarly, NYU’s Conlon cites examples where prices have risen in competitive markets. Used cars, for example, are sold in batches across the country and by many individuals. Still, average used car prices have risen by 16% in the last year. Similarly, the average price of basic appliances, another market with many competitors, jumped nearly 10% last month from a year earlier.
In contrast, the price of alcoholic beverages has risen by only 4% compared to a year earlier, although the beer market is dominated by AB-Inbev and spirits by Bacardi and Diageo.
“It’s hard to imagine that AB-Inbev is not as greedy as Maytag,” Conlon said.
So what caused the inflation jump the most?
“Search,” said Furman, who is now at Harvard University. “A lot of government spending, a lot of financial support – all together to maintain extremely high levels of demand. Supply could not be maintained, so prices rose.
Researchers from the Federal Reserve Bank of San Francisco estimate that government aid to the economy during the pandemic, which puts money in consumers’ pockets to help them survive the crisis and trigger a walk, has raised inflation by about 3 percentage points. the first half of 2021
In a report published in April, researchers from the Federal Reserve Bank of St. Louis accused bottlenecks in the global supply chain of playing a “significant role” in inflating factory costs. They found that last November he added a staggering 20 percentage points to wholesale inflation in manufacturing, raising it to 30%.
However, even some economists, who do not blame greed for the rise in prices over the past year, say they believe governments should try to limit the market power of monopolies, perhaps by blocking mergers that reduce competition. The idea is for more companies fighting for the same customers to encourage innovation and make the economy more productive.
However, tighter antitrust policies are unlikely to do much to slow inflation any time soon.
“I find it helpful to think of competition as diet and exercise,” said Conlon of New York University. “Most competition is a good thing. But, like diet and exercise, the gains are long-term.
“Currently, the patient is in the emergency department. Of course, diet and exercise are still a good thing. But we have to deal with the acute problem of inflation. “
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AP economics writer Christopher Rugaber contributed to this report.
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