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Greedflation: Do price cuts encourage high inflation?

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The Associated Press

Associated Press

Paul Wiseman

Washington (AP) — Furious with rising prices at gas stations and supermarkets, many consumers know where to take responsibility I feel that. A company that relentlessly raises prices and puts profits in its pocket.

In response to that sentiment, the Democratic-led House of Representatives passed a bill last month in a party vote designed to crack down on allegations of price cuts by energy producers.

Similarly, the UK last month announced plans to temporarily impose a 25% storm tax on the profits of oil and gas companies and to pour their profits into financially distressed households.

But for all the indignations, most economists say that corporate price cuts are at best one of the many causes of runaway inflation, not the main cause. It states.

"There are far more plausible candidates for what is happening," said Jose Hazard, an economist at the University of Navarra in Spain.

Includes: Strong consumer spending. Supply disruptions at factories, ports and cargo yards. Labor shortage. President Joe Biden's huge pandemic aid program. COVID19-A shutdown has occurred in China. Russia invades Ukraine. And, in particular, the Federal Reserve, which maintained ultra-low interest rates longer than experts should say.

If anything, the game of blame has intensified after the US government reported that inflation reached 8.6% year-on-year in May. This is the biggest price surge since 1981.

The Fed is lagging behind and aggressively tightening credit to combat inflation. On June 15, we raised the benchmark short-term interest rate by three-quarters. This is the largest rate hike since 1994 and shows that there will be even more significant rate hikes. The Fed wants to achieve the infamous and difficult "soft landing." That is, a slowdown in growth sufficient to curb inflation without putting the economy into recession.

Even if the unemployment rate fell to its lowest level in half a century, inflation remained below the Fed's annual target of 2% for many years. But when the economy recovered from the pandemic recession with tremendous speed and power, the US consumer price index rose steadily. From the year-on-year increase of 2.6% in March 2021, to the highest price in 40 years last month.

At least for some time, the surge in inflation coincided with the expansion of corporate profits, before the profit margins of S&P 500 companies fell earlier this year. It was easy for consumers to connect the dots. The company seems to have been engaged in price cuts. This is not just inflation. It was greedy.

Asked for the name of the culprit behind the soaring petrol prices 72 or Biden (58. And the verdict was bipartisan: 86% of Democrats and 52% of Republicans were petrol prices He blamed the company for soaring prices.

"It's very natural for consumers to get angry at the rise in prices and find someone to be held accountable," he said, studying corporate competition. Christopher Conlon, an economist at Stern Business School at the University of New York, said that prices cannot be set at supermarkets, petrol stations, and car dealerships, so people naturally blame companies because they are. We expect to raise prices. "

Still, Konron and many other economists are reluctant to support prosecuting or punishing corporate America. That's when the Chicago University booth business school asked economists this month if they would uphold a law prohibiting large companies from selling goods and services "rudely" overpriced during March. " Shock, 65% answered no. Only 5% supported the idea.

Economists said the combination of factors that caused the price to soar was an "unresolved problem." COVID-19 and its aftermath make it difficult to assess the state of the economy. Today's economists have no experience in analyzing the economic aftermath of the pandemic.

Policy makers and analysts have repeatedly been blind to the path the economy has taken since the outbreak of COVID in March 2020. By the Federal Reserve and other central banks. Then they are high. They were slow to recognize the threat of inflationary pressure and initially dismissed them as a mere temporary result of supply turmoil.

But one aspect of the economy is Indisputable. The wave of mergers over the last few decades has killed or reduced competition between airlines, banks, meat packaging companies, and many other industries. With this integration, surviving companies It is now possible to demand price cuts from suppliers, reduce worker wages, and pass on high costs to customers who have no choice but to pay

{. 61} Researchers at the Federal Reserve Bank of Boston have found that less competition makes it easier for businesses to pass on higher costs to their customers, which is called the "amplifying factor" for the resurgence of inflation.

Josh Vivens, research director at the Liberal Institute for Economic Policy, estimates that nearly 54% of non-financial business price increases since mid-2020 are due to "larger rates of return." .. From 1979 to 2019.

Bivens acknowledged that in the last two years, neither corporate greed nor market influence may have increased significantly. But he suggested that companies changed their use of market power during the surge in COVID inflation. Many companies put pressure on their suppliers to reduce costs and limit workers' wages, thus raising customer prices instead.

In a survey of about 3,700 companies released last week, the leftist Roosevelt Institute concluded that last year's markup and profit margins reached their highest levels since the 1950s. In addition, companies that were aggressively raising prices before the pandemic may raise prices after the pandemic occurs, as they "suggest the role of market power as an explanatory driver of inflation." Turned out to be high.

Still, many economists are not convinced that corporate greed is the main cause. Jason Farman, top economic adviser to the Obama White House, said the monopoly suggests that the monopoly is slower than companies facing fierce competition to raise prices when their costs rise. rice field.

Similarly, New York University's Konron gives an example of soaring prices in a highly competitive market. For example, used cars are sold by many individuals across the country. Still, average used car prices have skyrocketed 16% over the past year. Similarly, the average price of white goods, another market with many competitors, surged nearly 10% last month compared to the previous year.

In contrast, the price of alcoholic beverages was a year ago, even though the beer market was dominated by AB-Inbev and the spirits were dominated by Bacardi and Diageo. It is up only 4% from.

"It's not hard to imagine that AB-Inbev isn't as greedy as Maytag," Konron said.

So what caused the inflation surge the most?

"Demand," said Ferman, who is currently at Harvard University. “A lot of government spending, a lot of financial support—all combined to support a very high level of demand. Prices have risen because supply couldn't keep up.”

San Francisco Federation Reserve Bank researchers said government support for the economy during the pandemic put money in consumer pockets to help consumers endure the crisis and start spending, about 3 from the first half of 2021. Percentage points.

In a report released in April, researchers at the Federal Reserve Bank of St. Louis accused the global supply chain bottleneck of "playing an important role." .. Inflate the cost of the factory. They found that it added a staggering 20 percent points to manufacturing wholesale inflation last November and raised it to 30 percent.

Still, even some economists who don't blame greed because of last year's soaring prices should try to limit their monopoly market power, perhaps by blocking mergers that reduce competition. I think it is. The idea is that more companies competing for the same customer will drive innovation and increase the productivity of the economy.

Still, stricter antitrust policies will soon be less effective in slowing inflation.

"I think it's useful to think about competition like diet and exercise," said Konron of New York University. "More competition is good, but like diet and exercise, the rewards are long-term.

" Currently, patients are in the emergency room. Indeed, with diet The movement is still good, but we need to deal with the serious problem of inflation. "


AP Economics Writer Christopher Rugaber contributed to this report. Did.