WASHINGTON — Furious over soaring prices at the gas station and supermarket, many consumers feel they know exactly where to lay the blame: on the greedy corporations that relentlessly raise prices and pocket the profits.
In response to that sentiment, the Democratic-led House of Representatives last month passed a party-line vote — most Democrats for, all Republicans against — a bill aimed at cracking down on alleged price hikes by energy producers.
Similarly, Britain last month announced plans to impose a temporary 25% tax on the profits of oil and gas companies and channel the profits to households in financial difficulty.
Yet despite all the public resentment, most economists argue that rising business prices are, at most, one of many causes of runaway inflation — not the main one.
“There are much more plausible candidates for what is happening,” said Jose Azar, an economist at Spain’s University of Navarre.
They include: Supply disruptions at factories, ports and freight stations. Labor shortages. President Joe Biden’s massive pandemic relief package. Closures caused by COVID 19 in China. Russia’s invasion of Ukraine. And, not least, a Federal Reserve that has kept interest rates ultra-low longer than the pundits should have.
More importantly, economists say the upsurge in consumer and government spending has pushed up inflation.
The blame game is escalating, instead, after the US government announced inflation hit 8.6% in May from a year earlier, the biggest price spike since 1981.
To fight inflation, the Fed is now aggressively tightening credit. On June 15, it raised its benchmark short-term rate by three-quarters of a point – its biggest rise since 1994 – and signaled that more significant rate hikes were to come. The Fed hopes to achieve a notoriously difficult “soft landing” – slowing growth enough to rein in inflation without dragging the economy into recession.
For years, inflation has stayed at or below the Fed’s 2% annual target, even as unemployment has fallen to its lowest level in half a century. But when the economy rebounded from the pandemic recession with surprising speed and strength, the US consumer price index rose steadily – from a 2.6% year-over-year increase in March 2021 to the four-decade high of last month.
For a while at least – before profit margins for S&P 500 companies plummeted earlier this year – the surge in inflation coincided with rising corporate profits. It was easy for consumers to make the connection: the companies, it seemed, were indulging in price gouging. It wasn’t just inflation. It was greed.
Asked to name the culprits for soaring gas prices, 72% of 1,055 Americans polled in late April and early May by The Washington Post and George Mason University’s Schar School of Policy and Government blamed companies at profit, more than the share that highlighted Russia’s war on Ukraine (69%) or Biden (58%) or pandemic disruptions (58%). And the verdict was bipartisan: 86% of Democrats and 52% of Republicans accused the companies of inflating gas prices.
“It’s very natural for consumers to see prices go up and get angry and then look for someone to blame,” said Christopher Conlon, an economist at New York University’s Stern School of Business, who studies business competition. “You and I don’t have the right to fix the prices at the supermarket, at the gas station or at the car dealership. So people naturally blame the companies, since they are the ones seeing prices go up.”
Yet Conlon and many other economists are reluctant to indict — or favor punishment — Corporate America. When the University of Chicago’s Booth School of Business asked economists this month if they would support a law prohibiting large companies from selling their goods or services at an “unreasonably excessive price” during a market shock , 65% answered no. Only 5% supported the idea.
The question of which combination of factors is most responsible for the price spike “remains an open question”, acknowledges the economist Azar. COVID-19 and its consequences have made it difficult to assess the state of the economy. Economists today have no experience in analyzing the financial consequences of a pandemic.
Policymakers and analysts have repeatedly been blindsided by the path the economy has taken since COVID hit in March 2020: they did not expect a quick recovery from the downturn, fueled by huge government spending and historically low rates designed by the Fed and other central banks. Second, they were slow to recognize the growing threat of strong inflationary pressures, dismissing them at first as merely a temporary consequence of supply disruptions.
One aspect of the economy, however, is undisputed: A wave of mergers in recent decades has killed or reduced competition among airlines, banks, meatpackers and many other industries. This consolidation gave surviving companies the power to demand price cuts from suppliers, maintain worker wages, and pass on higher costs to customers who have no choice but to pay.
Researchers at the Federal Reserve Bank of Boston found that less competition made it easier for businesses to pass on higher costs to customers, calling it an “amplifying factor” for the resurgence of inflation.
Josh Bivens, research director at the liberal Economic Policy Institute, estimated that nearly 54% of price increases in non-financial companies since mid-2020 can be attributed to “wider profit margins”, compared to just 11% in 1979 to 2019.
Bivens admitted that neither corporate greed nor market influence has likely increased significantly over the past two years. But he suggested that during the inflationary peak of COVID, companies have reoriented the way they use their market power: many have stopped pressuring suppliers to cut costs and limit worker wages and have rather raised prices for customers.
In a study of nearly 3,700 companies released last week, the left-leaning Roosevelt Institute concluded that profit margins and profit margins last year reached their highest level since the 1950s. It also found that firms that had raised prices aggressively before the pandemic were more likely to do so after it hit, “suggesting a role for market power as an explanatory driver of inflation.”
Yet many economists are not convinced that corporate greed is the main culprit. Jason Furman, a top economic adviser to the Obama White House, said some evidence even suggests monopolies are slower than firms that face fierce competition to raise prices when their own costs rise. , “partly because their prices were high to begin with. ”
Similarly, NYU’s Conlon cites examples where prices have skyrocketed in competitive markets. Used cars, for example, are sold in lots across the country and by many people. Yet average used car prices have climbed 16% over the past year. Similarly, the average price of major appliances, another market with many competitors, jumped nearly 10% last month from a year earlier.
On the other hand, the price of alcoholic beverages only increased by 4% compared to a year ago, while the beer market is dominated by AB-Inbev and that of spirits by Bacardi and Diageo.
“It’s hard to imagine AB-Inbev not being as greedy as Maytag,” Conlon said.
So what drove the inflationary peak the most?
“The demand,” said Furman, now at Harvard University. “Lots of government spending, lots of monetary support – all combined to support extraordinarily high levels of demand. Supply could not keep up, so prices rose.
Researchers at the Federal Reserve Bank of San Francisco believe that government aid to the economy during the pandemic, which put money in consumers’ pockets to help them weather the crisis and sparked a spending spree, has pushed up inflation by around 3 percentage points since the first half of 2021.
In a report released in April, researchers at the Federal Reserve Bank of St. Louis blamed global supply chain bottlenecks for playing a “significant role” in factory cost inflation. They found that this added 20 percentage points to wholesale inflation in the manufacturing sector last November, bringing it to 30%.
Yet even some economists who don’t blame greed for last year’s price spike say they think governments should try to restrict the market power of monopolies, perhaps by blocking mergers that reduce competition. The idea is that more companies vying for the same customers would encourage innovation and make the economy more productive.
Even so, tougher antitrust policies would likely do little to slow inflation any time soon.
“I find it helpful to think of competition like diet and exercise,” said NYU’s Conlon. “More competition is a good thing. But, like diet and exercise, the benefits are long-term.
“At the moment, the patient is in the emergency room. Of course, diet and exercise are always a good thing. But we have to deal with the acute problem of inflation.