Corporate greed isn’t driving inflation – expansionary fiscal policy & supply-chain disruptions ignited this round of inflation

More sophisticated evaders argue that inflation is confined to a few product lines: goods, up 12.9% for the 12 months ending in April 2022, rather than services, up just 5.4% (still the highest in over 30 years); energy, up 30.2%, led by gasoline, up 43.6%; used cars, up 22.7%. Used car prices, which have decelerated in recent months, were on a tear because a shortage of semiconductors is dragging down new car production, increasing demand for the previously owned variety. Food prices are up 9.4% — barely under double digits, but the biggest yearly rise since 1981. There are several problems with this “narrowly confined” claim. One is that food and energy are essential items, accounting for about 20% of the average household’s spending, and rather hard to cut back on. Another is that so-called core inflation, which excludes food and energy because their prices can be volatile and may obscure underlying trends, was 6.1% for the year ending in April, a rate unseen since 1982. And yet another is that price indexes put out by the Federal Reserve banks of Cleveland and New York, which strip out extreme price changes of just the sort that the “narrowly confined” partisans are pointing to, are rising as well. Inflation is real. Where’s it coming from? Some liberal and left pundits are attributing inflation to monopolistic price gouging. As Robert Reich, Bill Clinton’s labor secretary, wrote recently: If markets were competitive, companies would keep their prices down in order to prevent competitors from grabbing away customers. But they’re raising prices even as they rake in record profits. How can this be? They have so much market power they can raise prices with impunity. Viewed this way, the underlying problem isn’t inflation per se. It’s lack of competition. Corporations are using the excuse of inflation to raise prices and make fatter profits. The problem with this explanation is that market concentration hasn’t changed from 2019, when inflation was well under 2%. If corporations could raise prices with “impunity,” why didn’t they then? And what exactly is this “inflation” that they’re using as an excuse? A preexisting specter roaming about all on its own? Besides, “record profits” are very routine. US corporations have made record profits in over 40% of the quarters since 1947, excluding recessions. This isn’t a serious explanation. Josh Bivens, research director of the Economic Policy Institute, made a more sophisticated version of the profits argument than Reich, contending that profits’ contribution to rising corporate costs has been high relative to historical averages, and labor costs low. This is true, but it’s also not unusual behavior for the first six quarters after the end of a recession. And it doesn’t explain why firms didn’t spend the previous 40 years boosting profits by raising prices. Again, what is this preexisting inflation that firms are taking advantage of? Inflation is complicated, but there’s a simple thing you can say about the current version: immense amounts of purchasing power were injected into an economy that was stretched to the limit. Pandemic support payments amounted to over a trillion dollars — crucial support that kept scores of millions from destitution, but it came as COVID-19 was wreaking havoc on production. The pandemic took millions of workers off the job, and precautions shut down factories and ports. That threw global supply chains — a phrase that has sadly moved from the business press into daily conversation over the last year — into chaos, rendering it difficult to buy goods like cars and appliances, which are assembled from components produced all over the world. Readers of the monthly reports of the Institute for Supply Management’s survey of purchasing managers have been treated to two years of complaints about the impossibility of acquiring basic industrial supplies. Some highlights: “Business is robust, but logistics and supply cannot keep up.” “The current electronics/semiconductor shortage is having tremendous impacts on lead times and pricing. Additionally, there appears to be a general inflation of prices across most, if not all, supply lines.” “Lots of work on the floor, but I am worried about getting the materials to support.” “In 35 years of purchasing, I’ve never seen everything like these extended lead times and rising prices.” There was no cushion from inventories, thanks to the fashion for keeping only the smallest stocks on hand, to minimize the costs of idle capital. Add to that years of corporate underinvestment — much better to shower the shareholders with cash than invest in productive equipment — as well as neglect of public infrastructure, and you get the price chaos we’re living in.