Perfect Storm for Inflation

 Peter Coy analyzes the roots of the current inflation.

it’s not a simple story of businesses driving up prices to earn more money, Mike Konczal, one of the paper’s authors, who is the institute’s director of macroeconomic analysis, told me. “Is greed the sole or main reason for inflation?” he asked. “I’d say no. It’s part of the mix of explanations that should be under consideration.”

What is the chief cause of today’s high inflation — strong demand, supply shortages or rising profit margins? Those who cite strong demand blame the Biden administration, Congress and the Federal Reserve for overstimulating the economy. Those who cite supply shortages point fingers at disruptions caused by anomalies such as the Covid-19 pandemic and Russia’s invasion of Ukraine. Foes of corporate bigness focus on the excess-profits theory.

There’s some evidence for all three explanations, according to the paper, “Prices, Profits and Power: An Analysis of 2021 Firm-Level Markups,” by Konczal and Niko Lusiani, the director of the Roosevelt Institute’s corporate power team.

Supporting the strong-demand theory of inflation is the fact that increases in markups were widespread among many types and sizes of companies, suggesting that economywide strength in the demand for goods and services was an important factor in price increases, the authors found.

At the same time, markups increased more sharply in industries that experienced disruptions, indicating that supply chain problems were also a factor in inflation. Among the sectors with big markups were real estate, mining, quarrying and oil and gas extraction. (The biggest markup increase that the authors found was in finance and insurance, which is a bit strange, since that sector wasn’t obviously bottlenecked.)

The third explanation, rising profit margins, isn’t an alternative but rather a supplement to the demand and supply explanations. It says that companies seized the opportunity of strong demand and weak supply to increase their profits. Supporting that theory is the authors’ finding that, after adjustments for size, companies that increased prices before 2021 were the most likely to increase prices in 2021. That indicates that they had a position in the market that made it easier for them to impose price increases and make them stick.