Most economists say that price gouging is at most one of many causes of runaway inflation – and not the primary one.
WASHINGTON – Furious at soaring gas station and grocery store prices, many consumers believe they know exactly where to blame: greedy companies that are relentlessly driving up prices and reaping the profits.
In response to this sentiment, the Democrat-led House of Representatives last month passed a party-line vote—most Democrats in favor, all Republicans against—a bill aimed at cracking down on alleged price-gouging by energy producers.
Similarly, last month the UK announced plans to impose a temporary 25% windfall tax on oil and gas company profits and pass the proceeds on to financially troubled households.
But for all the public resentment, most economists say corporate price-gouging is at most one of many causes of runaway inflation — not the main one.
“There are far more plausible candidates for what’s going on,” said Jose Azar, an economist at Spain’s University of Navarre.
These include: Supply disruptions in factories, ports and freight yards. labor shortage. President Joe Biden’s massive pandemic relief program. Shutdowns in China caused by COVID 19. Russia’s invasion of Ukraine. And last but not least, a Federal Reserve that has kept interest rates extremely low longer than experts say it should have.
Most importantly, however, economists say rising spending by consumers and governments has pushed up inflation.
Rather, the blame game intensified after the US government reported inflation hit 8.6% yoy in May, the biggest rise in prices since 1981.
RELATED: US inflation hit a new 40-year high at 8.6% last month
To combat inflation, the Fed is now aggressively tightening belated lending. On June 15, it raised its benchmark short-term interest rate by three-quarters of a point — the largest hike since 1994 — signaling that more big hikes were on the way. The Fed is hoping to achieve a notoriously difficult “soft landing” – slowing growth enough to contain inflation without sending the economy into recession.
For years, inflation had stayed at or below the Fed’s annual target of 2%, even as unemployment fell to a half-century low. But as the economy recovered from the pandemic recession with amazing speed and strength, the U.S. CPI rose steadily — from a 2.6% year-over-year increase in March 2021 to last month’s four-decade high.
At least for a while — before profit margins for S&P 500 companies plummeted earlier this year — the surge in inflation coincided with rising corporate earnings. It was easy for consumers to connect the dots: companies, it seemed, were caught up in price gouging. It wasn’t just inflation. It was greed inflation.
When asked to identify the culprits behind the rise in gas prices, more than 72% of the 1,055 Americans polled by the Washington Post and George Mason University’s Schar School of Policy and Government in late April and early May blamed for-profit corporations the proportion of Who pointed to Russia’s war on Ukraine (69%) or Biden (58%) or pandemic disruption (58%). And the verdict was bipartisan: 86% of Democrats and 52% of Republicans blamed corporations for excessive gas prices.
“It’s natural for consumers to see rising prices and get angry and then look for a culprit,” said Christopher Conlon, an economist at New York University’s Stern School of Business who studies corporate competition. “You and I can’t set prices at the grocery store, gas station, or car dealership. So of course people blame the corporations because they see them raising prices.”
But Conlon and many other economists are reluctant to impeach corporate America — or advocate punishment. When the University of Chicago Booth School of Business asked economists this month if they would support a law that would prohibit large companies from selling their goods or services at an “unscrupulously inflated price” during a market shock, 65% said no. Only 5% supported the idea.
Which combination of factors is most responsible for the price increase “is still an open question,” admits the economist Azar. COVID-19 and its aftermath have made it difficult to assess the state of the economy. Today’s economists have no experience in analyzing the financial consequences of a pandemic.
Policymakers and analysts have been repeatedly surprised by the trajectory the economy has taken since the outbreak of COVID in March 2020: they did not anticipate the rapid recovery from the recession, which was punctuated by huge government spending and record-low interest rates promoted by the Fed and other central governments were developed, banks were fueled. Then they were slow to recognize the growing threat of high inflationary pressures, initially dismissing them as only a temporary consequence of supply disruptions.
One aspect of the economy, however, is undisputed: A wave of mergers over the past few decades has killed or shrunk competition between airlines, banks, meatpackers and many other industries. This consolidation has given the surviving companies the ability to demand price cuts from suppliers, keep workers’ wages low, and pass the higher costs on to customers who have no choice but to pay.
Researchers at the Federal Reserve Bank of Boston have found that less competition makes it easier for companies to pass higher costs on to customers, calling this a “contributing factor” to the resurgence of inflation.
Josh Bivens, research director at the liberal Economic Policy Institute, has estimated that nearly 54% of price increases at non-financial firms since mid-2020 are due to “higher profit margins,” up from just 11% from 1979 to 2019.
Bivens acknowledged that neither corporate greed nor market power have increased significantly over the past two years. However, he suggested that during the COVID inflation surge, companies have recalibrated the way they use their market power: many have turned away from pressurizing suppliers to cut costs and cap workers’ wages , and instead increased prices for customers.
In a study of nearly 3,700 companies released last week, the left-leaning Roosevelt Institute concluded that markups and profit margins hit their highest levels since the 1950s last year. It also found that companies that had aggressively raised prices before the pandemic were more likely to do so post-pandemic, “suggesting a role for market power as an explanatory driver of inflation.”
However, many economists are not convinced that corporate greed is the main culprit. Jason Furman, a senior economic adviser to the Obama White House, said some evidence even suggests that monopolies are slower than corporations, which face stiff competition to raise prices when their own costs rise, “in part, because their prices were high to begin with. ”
Likewise, NYU’s Conlon cites examples where prices have skyrocketed in competitive markets. For example, used cars are sold nationwide and by numerous private individuals. Still, average used car prices have skyrocketed 16% over the past year. Similarly, the average price of large appliances, another market with many competitors, rose nearly 10% year over year last month.
In contrast, alcohol prices are up just 4% year over year, despite the beer market being dominated by AB-Inbev and spirits by Bacardi and Diageo.
“It’s hard to imagine AB-Inbev not being as greedy as Maytag,” Conlon said.
So what drove the surge in inflation the most?
“Demand,” said Furman, now at Harvard University. “Lots of government spending, lots of financial support – all put together to support exceptionally high demand. Supply couldn’t keep up, so prices went up.”
Researchers at the Federal Reserve Bank of San Francisco estimate that government aid to the economy during the pandemic, which poured money into consumers’ pockets to help them weather the crisis and spur a spending spree, has kept inflation down by around 3 percentage points increased in the first half of 2021.
In a report released in April, researchers at the Federal Reserve Bank of St. Louis blamed global supply chain bottlenecks for playing a “significant role” in inflating factory costs. They found that wholesale manufacturing inflation rose a staggering 20 percentage points to 30% last November.
Still, even some economists who don’t blame greedflation for last year’s rise in prices say they think governments should try to limit the market power of monopolies, perhaps by blocking mergers that restrict competition. The idea is that more companies competing for the same customers would encourage innovation and make the economy more productive.
Even so, tighter anti-trust policies probably wouldn’t do much to curb inflation anytime soon.
“I find it helpful to think about competition like diet and exercise,” NYU’s Conlon said. “More competition is good. But, like diet and exercise, the payoffs are long-term.
“Right now the patient is in the emergency room. Sure, diet and exercise are still a good thing. But we have to address the acute problem of inflation.”
https://www.king5.com/article/news/nation-world/price-gouging-inflation/507-c70fad4b-3c86-4c18-b8f0-786c2009991e Did corporate price gouging cause gas, grocery price inflation?