The Source of Inflation?

I’ve avoided the topic of inflation because I’m no expert on inflation, but I saw something on LinkedIn earlier in the week that was noteworthy.

Earlier in the year, President Biden mentioned something about companies as being the cause of pernicious inflation, but I really did see a whole bunch of articles, especially from the premier news sources, discussing corporate greed as the reason for our inflation. I kind of discounted what he was saying because no one else was chiming in to support what he was saying – at least from what I could tell.

He must have had some secret information sources, kind of like he was saying in late December 2021 that Russia was amassing their military forces outside of Ukraine, kind of like in preparation for an invasion. Everybody pooh-pahed and said that wasn’t happening. Except it happened on February 24, 2022.

So maybe in a similar way, President Biden was calling out the corporate greed based upon some secret information he had.

Lately, I’ve been seeing some references to the causes of our current inflation. In LinkedIn, someone posted an image from the Economic Policy Institute. There were two things noteworthy about the post. First, the percentage of the attribution of inflation given toward companies’ pricing method (or price gouging if you are so inclined) was 53%. Many of the financial commentators noted that that percentage was rather high. I also was kind of surprised by the percentage.

I will go on a bit more about this inflation thing, but I wanted to briefly touch on the second noteworthy thing about the post: it immediately generated a heated, almost political, response to the post. So, bring up inflation and you might get into a political battle, which is sad because we need to figure out how to tame inflation without proverbially killing people. It was like the commentator wanted to make sure that this idea of corporate greed did not go far because it would make companies look bad or it would help Biden. I don’t know what the intent was but the comment was very heated and the poster tried to calm down the atmosphere. Eventually, the poster did not respond.

Now back to the inflation thing and the idea that sky high corporate profits meant that there were price gouging going on.

I know nothing about inflation other than we went through one bad spell in the 70’s which induced Paul Volcker and the Fed to raise rates at a high level, thus tanking the economy for a while. People apparently have bad memories about that time period.

So, inflation is a boogie man – maybe a valid one. I was too young to understand that time period so I can’t speak to it.

When I saw the image the poster uploaded, I went researching again to see if credible news sources were talking about corporate greed as the main contribution to our inflation. I have to say not really. Yes, there are articles out there, but they are coming from relatively obscure news sources – they look like left leaning sources. I have to take the left leaning sources with a grain of salt: their assertion may be true but they may also be driven by bias.

New York Times gave a more nuanced picture of the contributors to inflation. Here are two arguments for sources of inflation:

Case 1

“Inflation first rose because of other factors, like Covid and economic stimulus bills. But companies raised prices more than necessary to net higher profits. They knew they could get away with it because consumers no longer had a benchmark for what prices should be. And they did not face enough competition to keep prices down.”

New York Times, “Inflation and Price Gouging”, June 14, 2022

Case 2

“Covid disrupted supply chains globally. Russia’s invasion of Ukraine caused another wave of disruptions, particularly in food and energy. The stimulus bills left people with a lot of extra cash, and many Americans spent it. That prompted too much demand for too little supply, so prices increased.”

New York Times, “Inflation and Price Gouging”, June 14, 2022

The big indicator of corporate greed would come from signs of excessive profits. For a while, early in the COVID time period, profits appeared to surge while everybody worked at home and supply chains got disrupted. Those profits in the face of supply constraints kind of suggested some kind of price gouging going on.

However, now, those surging profits appear to be gone, thus negating the price gouging theory. It appears like other factors are involved.

Anyhow, that is the author’s take and it does sound like a reasonable logical conclusion. We’ll have to see how the corporate profits shake out in the coming months. I think the oil and gas industry and the food industry has a-historically high profits going on but the tech industry may be facing winds.

That 53% might be too for corporate profits as the reason for inflation.