The prime suspects
According to the latest data, prices have increased by 7.7% this year. However, certain goods and services such as eggs, health insurance, and gasoline have seen a much higher price increase.
Inflation can be a sneaky and harmful force that erodes our savings and reduces the purchasing power of our wages. It can impact our ability to afford things like vacations and everyday necessities, like food. So, what causes inflation? Let’s explore the potential sources and culprits.
The prime suspects
There are several factors that are often cited by economists and politicians on the left as contributing to inflation. One of these is the war in Ukraine, which has led to an increase in oil prices that has a ripple effect on the cost of many other goods and services. Another factor is the greed of companies, which are able to achieve record profits even in the face of supply chain disruptions and rising costs. Some argue that corporations are using their power to drive up prices for consumers.
The smoking price gun
Corporate profits hit an all-time high this year, with many companies reporting record profits. This has led some to question where these billions of dollars in profits are coming from, given that many businesses have claimed to be struggling with rising costs and supply chain issues. It appears that companies may be using these challenges as an excuse to increase prices for consumers, potentially leading to higher inflation.
Rakeen Mabud, chief economist for the progressive think tank Groundwork Collaborative, has observed that companies are taking advantage of consumers by raising prices during a time when many families are struggling financially. Mabud has participated in numerous corporate earnings calls and has heard CEOs boast about their ability to increase prices.
For example, Kroger, a major grocery chain, has made billions in profits in recent years. In a call with investors, CEO Rodney McMullen stated that “we view a little bit of inflation as always good in our business and we would expect to be able to pass that through.” Similarly, AutoZone, a company that sells car parts and accessories, saw a 13% increase in earnings. CFO Jamere Jackson referred to inflation as “a little bit of our friend in terms of what we see in terms of retail pricing.” These comments suggest that some companies are actively seeking to benefit from inflation, rather than working to minimize its impact on consumer
Murder on the competition express
There are several factors that suggest corporations may be contributing to inflation. One of these is the consolidation of the corporate landscape in the United States over the past several decades. For example, four companies control approximately 80% of the beef and poultry market in the U.S. This lack of competition can lead to less pressure on companies to keep prices low for consumers.
There have been several instances of price-fixing in the meat industry this year, and the proposed merger between Kroger and Albertsons has raised concerns about the potential for higher prices for many consumers. These examples suggest that companies may be taking advantage of their market power to drive up prices.
The prices of raw materials have been increasing throughout the year, and this trend is reflected in the higher prices that consumers are paying in stores. In fact, the increase in wholesale prices (the cost of raw materials for manufacturers) has been even greater than the overall increase in consumer prices, which have risen by 7.7% compared to last year. This suggests that manufacturers and retailers are largely passing along the higher cost of raw materials to consumers, contributing to the overall increase in prices.
According to economist Jason Furman, blaming inflation on greed is like blaming a plane crash on gravity. While it is technically accurate, it does not address the underlying causes of the problem.
According to Wolfers, companies are always seeking to maximize their profits by charging as much as they can. However, the only reason that prices for goods and services like socks and cheeseburgers aren’t even higher is due to competition among companies. This competition drives companies to offer lower prices in an effort to outdo their competitors, leading to some moderation in prices. In this way, greed in one form (the desire to charge high prices) is counteracted by greed in another form (the desire to win market share).
A crime of opportunity
Despite the current trend of rising prices and stagnant wages, Wolfers believes that this dynamic is unlikely to continue for long. With low unemployment and fierce competition among companies to hire talented workers, employees are likely to negotiate for higher pay. In order to retain and attract top talent, companies may be forced to offer higher wages. This could lead to a shift in the distribution of profits, with a greater portion going towards worker salaries rather than being retained as corporate profits.
And the killer is …
According to Wolfers, consumers may be partially responsible for the current inflation trend. Despite rising prices, demand has remained strong, with consumers continuing to buy goods and services even as prices increase. This willingness to pay higher prices has allowed companies to keep raising prices, contributing to the overall increase in inflation.
One possible explanation for this trend is that consumers are spending money they don’t necessarily have, as household debt has been increasing while savings have been declining. This may not be a sustainable pattern, and it is likely that demand will eventually decline. When this happens, companies will be forced to lower prices in order to entice consumers to buy, leading to a decline in inflation. Until demand drops, however, companies will continue to push prices up as much as possible.