Corporate Influence on Inflation
October 20, 2022 7:23 AM   Subscribe

Single link (warning: long video with transcript): Corporate Influence on Inflation

From the description:

Economists and academics testified at a House Oversight and Reform Subcommittee on Economic and Consumer Policy hearing on the role certain industries and corporations have had in driving inflation. Democratic members and most of the witnesses contended that some corporations were contributing to inflation by overcharging for goods and services. Republican members and one of the witnesses, however, blamed the Biden administration and Democratic policies, such as the American Rescue Plan, for inflationary prices.

A more succint presentation: Corporate profits have contributed disproportionately to inflation. How should policymakers respond?

Since the trough of the COVID-19 recession in the second quarter of 2020, overall prices in the NFC sector have risen at an annualized rate of 6.1%—a pronounced acceleration over the 1.8% price growth that characterized the pre-pandemic business cycle of 2007–2019. Strikingly, over half of this increase (53.9%) can be attributed to fatter profit margins, with labor costs contributing less than 8% of this increase. This is not normal. From 1979 to 2019, profits only contributed about 11% to price growth and labor costs over 60%
posted by doggod (25 comments total) 21 users marked this as a favorite
How should policymakers respond?

Strengthen and enforce anti-trust laws and measures. Corporations are raking in record profits because there's no competition in the market.

Where natural monopolies exist, they should be nationalized and held as a public good.

The "free market" means all are free to participate, and that government is ready to intervene to preserve that freedom. It does not mean people are "free" to throw their weight around to block others from competing.
posted by explosion at 7:53 AM on October 20, 2022 [34 favorites]

It’s almost like conservative businesses want Biden to fail somehow.
posted by Abehammerb Lincoln at 8:33 AM on October 20, 2022 [23 favorites]

It’s almost like conservative businesses want Biden to fail somehow.

Yes, they do, but my feeling as an employee of a corporation that's gleefully (like upper managers are almost jumping out of their chairs to click their heels and cackle) gouging customers left and right. This is just naked greed. Political consequences are just a plesent side effect.
posted by Dr. Twist at 8:40 AM on October 20, 2022 [13 favorites]

I've been hearing lots of scattered reports about this - gas profits way up, shipping profits way up, grocery store profits way up, for goodness sake - but it is encouraging and helpful to get the testimony from this hearing.

The Economic Policy Institute analysis is very interesting, too, especially this bit near the end:
The overheating view often emphasizes the atypically fast nominal wage growth of the past year as justification of their arguments. But this nominal wage growth—while fast compared to the very recent past—still lags far behind overall inflation and hence signals that labor costs are still dampening, not amplifying, inflationary pressures.
I was glad there was a transcript of the hearing, but having to click dozens of "Show Full Text" links seems like an accessibility nightmare, so I compiled the whole transcript into a single page and posted it to my blog - the link is in my profile.

Thank you so much for posting this, doggod. I appreciate the opportunity to become better informed about what's going on with inflation and to see my legislature in action.
posted by kristi at 9:07 AM on October 20, 2022 [8 favorites]

How should policymakers respond?
It's crazy how people act like the solutions aren't in large part already known. We know what to do, the problem is we're failing at democracy.
posted by flamk at 9:53 AM on October 20, 2022 [8 favorites]

flamk, and anyone else in this thread: could you elaborate? What SHOULD we do, specifically? Like, if I had a meeting with my congressfolk, what should I recommend?

Oddly, I don't even see many specific proposals in the How should policymakers respond? piece - about all I find (admittedly, I'm skimming) is:
Other tools that would be less damaging to typical families—like care investments to boost expected growth in labor supply or a temporary excess profits tax—could be effective in tamping down inflation over the next year and should be a bigger part of the policy mix.
I would love to see suggestions from the smart folks here at MeFi and from thoughtful policy wonks elsewhere about specific legislation or executive directive actions that would be helpful and would benefit the nation as a whole.

(I know about, and am a fan of, the recent Inflation Reduction Act, and I wish the much more expansive program would have passed. But I don't know specifically what else folks suggest: taxing windfall profits? Or what?)
posted by kristi at 10:16 AM on October 20, 2022 [5 favorites]

Actually enforce our existing antitrust laws - real competition would drive down some of this - this could be done, as I understand it (though my understanding could be wrong, I am hardly an expert), through executive action without having to argue about it in Congress.

Strengthen antitrust laws - this gets Congress involved so is harder.

Tax windfall profits - same but I think worth the try. Sanders has a thing about it with more details.
posted by joannemerriam at 10:26 AM on October 20, 2022 [15 favorites]

What SHOULD we do, specifically?

In the case of my employer, change accounting rules so that you cannot tack additional profit on top of any kind of surcharge. one of the most egregious gougings that i've watched happen is that due to supply chain conditions in the electronic components markets, we are having to source some components at significant markup through brokers. we pass these costs on to customers as PPV surcharges, which can be raise the price by 20% or more. included in that price is additional profit so they can "preserve margin". It's naked gouging and should be prohibited.
posted by Dr. Twist at 10:52 AM on October 20, 2022 [16 favorites]

According to a podcast I listened to the other day, those high margin, high profit smartphones are actually driving CPI down. Every year they introduce new features and more memory and megapixels, but the CPI is supposed to compare like with like. So the BLS applies a "hedonic adjustment" to your new phone, to compare it against the benchmark phone from a decade ago.

So even though profits are in the billions, and profit margins in the 30 percent range, and prices never fall, the entire product category pushes CPI lower than it otherwise would be.
posted by pwnguin at 10:55 AM on October 20, 2022

For those interested in more detail on the effect of supply chains on inflation and prices generally, an article from the new cooperative magazine, Strange Matters:
The supply chain theory of inflation is essentially that widespread price increases result from a sudden, unexpected cost increase across a supply chain that none of its participant firms can adjust to without raising prices.

We’ve established from the economic survey literature presented above that firms are strongly biased towards price stability – they don’t want to raise them if they don’t have to, and would much prefer to increase output rather than price in order to take advantage of revenue opportunities. And if they do raise prices, it is typically only gradually over the course of many years. An important question for inflation theory, then, is what causes whoever is the first one to raise prices to do so?

The original price-hike, or progenitor price increase, if you will, is the logical starting point for any potential inflation to develop. We know that firms use rules of thumb for their pricing in the face of uncertainty – if events outside of their control upend production such that there are notable shortages of necessary inputs for a firm, they will first coordinate with their suppliers, utilizing every option other than a price increase to try and make up for lost revenue. Firms will choose to absorb losses from missed or canceled orders without raising their prices for a time, but they won’t put up with this forever. The longer the disrupted supply conditions last; the more likely it is that the firm will choose to eventually raise its prices, thus becoming the first firm to do so in a supply chain. If that price increase continues unabated, then this means a prolonged increase in costs for their customers. And as a result, those customer firms may well join in on the price-hike, triggering cost and therefore price increases down the supply chain, which constitutes inflation.

Notes Towards a Theory of Inflation
posted by wuwei at 11:27 AM on October 20, 2022 [3 favorites]

It's weird to me how all the politicians blame Biden for inflation when it's higher in the EU and UK. Even in Japan where the rate is relatively low, it's still at an eight year high.
posted by CheeseDigestsAll at 12:17 PM on October 20, 2022 [10 favorites]

It's weird to me how all the politicians blame Biden for inflation when it's higher in the EU and UK. Even in Japan where the rate is relatively low, it's still at an eight year high.

Republicans have absolutely zero standing in reality anymore.
posted by OnTheLastCastle at 12:44 PM on October 20, 2022 [22 favorites]

~It's weird to me how all the politicians blame Biden for inflation when it's higher in the EU and UK. Even in Japan where the rate is relatively low, it's still at an eight year high.

~Republicans have absolutely zero standing in reality anymore.

I feel the same about republicans, but their blaming Biden for inflation is simply Politics-101. Always punch the incumbent (and/or their party) with whatever bad news you can. Lather/rinse/repeat. It’s been that way for ages, in any state where the citizens get to vote.
posted by Thorzdad at 1:14 PM on October 20, 2022 [10 favorites]

I'm no economist or policy wonk, but it seems to me enforcement (whether that's anti-trust enforcement, labor law enforcement, environment and safety enforcement, fair housing enforcement, tax/IRS enforcement, etc etc etc) . . . would all go a long way to putting the fear of God (or government) into the capitalist/owner class. In our society there is, on the one hand, a rampant lawlessness among the wealthy and connected and a draconian police-state for the rest of us on the other. Treat any of this white collar shit like they treat bus fare evaders, shoplifters and drivers with missing license plate tags and the problem would be gone. Old Wealthy White People In Orange Jumpsuits every day on the nightly news and this would all be resolved.

This isn't about finding the right technocratic policy solution, its about upholding and enforcing the rule of law.
posted by flamk at 1:57 PM on October 20, 2022 [11 favorites]

In Ontario, Conservative Premier Droog Fnord is gleefully punching the previous administration (last in office six years ago) for our current year-over-year inflation. I mean ... it's ... it's probably working, too. [ sighs ]
posted by seanmpuckett at 1:58 PM on October 20, 2022 [2 favorites]

I thought "inflation" was defined entirely in terms of productivty. Personally I've been wondering if "inflation" is a synonym for "worker power," given the compensation changes over the pandemic. Furthermore, how is "prices always go up" not a part of this? I saw something yesterday about some activist shareholder at some company agitating for them to "lift margins," which also sounds to me to be a euphemism for "raise prices."
posted by rhizome at 3:07 PM on October 20, 2022 [1 favorite]

Ok, so I am in the thick of things, working in the automotive industry - an industry with massive interlinked supply chains (geographically and temporally) and hundreds of thousands of workers - and my view is that the Covid supply-side shock is still very much ongoing. Component shortages are still driving regular plant shutdowns / slowdowns, constricting supply of vehicles and forcing buyers to compete to pay more to obtain cars, because there are simply less cars available for sale.

Is this the classical definition of inflation, too much money chasing too few goods? Yes. (Link: Average Transaction Price / Average Incentive by month - see the insane spike when Covid started, with incentives falling from a stable 11% down to 2%).

But mechanically, corporate profits increasing is simply the shift from a buyers market to a sellers market.

Using basic economics 101 framework, say it costs $30,000 to build a car, and a consumer "values" a car at $40,000 - that's the total benefit they get from having a car, versus the inconvenience of having to use public transport. If the transaction price of a car in the marketplace is below $30,000, manufacturers wouldn't build any, and if the transaction price of the car in the marketplace is above $40,000, consumers wouldn't buy any. So you have a possible range of $30,000 - $40,000 that buyers and sellers can transact at.

Historically, the automotive industry operated on a volume basis - build more volume, reap economics of scale, get your car cheaper than the competition, flood the market and gain more market share, even if you quite often lose money doing so, because of the vicious death spiral that results if your market share slips - lower market share, lower volume, means higher costs, higher price, then lower volume again, etc. That's why the industry typically held 3 months of inventory on dealer lots at any one point - if a dealership sold 1,000 cars a month, they would have 3,000 cars sitting around for the consumer when they walked in to buy one.

This means that in our hypothetical example, cars would transact nearer the bottom of the $30,000-$40,000 price range, because all the cards were in the consumer's hands - the customer could just walk to the dealership next door and buy a car from them instead, so all the dealers (and automakers) competed the price down to the point they made just a bare minimum maintenance profit. If they made any less profit they would go out of business. Say the cars would sell at $31,000. And this is true, automotive profits have been pretty awful, historically.

Nowadays though? Supply chain disruptions caused months long production shutdowns. Vehicle inventories were closer to 1 month or less. You could walk into a dealer and many popular models are in such critically low supply that you could put down a $1,000 deposit just to join a waiting list to receive the model in 6 months to 12 months time. Now all the cards are in the dealer's hands - if the dealer doesn't transact with you, he could just transact with the next customer that walks in. Customers then compete UP the price to the maximum level they would be willing to pay in order to get a car, so the cars might transact nearer $39,000.

This shifts the "free value" that used to be captured by the consumer (as consumer surplus) back onto the manufacturer (as profits).

When will prices revert to "normal"? Years, or maybe, never. There's two aspects to the production losses during Covid - first, the actual units of inventory lost, say we lost 4 months of production during the 2 years of Covid. If we made workers do 6 days a week starting today - an extra 20% production - we would take 20 more months just to catch up to the lost production. And that's assuming we're back to 100% capacity today, which is the other aspect of this - production capacity has been crippled by Covid due to destruction of existing capacity (permanent closures of plants and companies) and delay in investment in starting new ones. Global production capacity fell by 4.2% during the first year of Covid, and while there might be a rebound, we are going to be about 2% below a "no Covid" scenario as far as we can see.

Anyway, that's assuming people would want to work 6 days a week for 2 years in a row. No one is going to do that, so the supply shock is going to stay with us for maybe 5-6 years. That's what I say when people ask "so when are prices going to return to the normal, pre-Covid state". If everyone worked 6 days a week to produce the missing goods in the system, they would be paid more money (overtime) and then... there's yet more money chasing limited goods in the system.

Do companies love the extra profits? Yes. But that's a short term thing. These are companies with 100 year outlooks and thrive when they can get higher market share and volumes in to reduce costs. Smartphones are dominated by Apple and Samsung, chips by Intel and AMD and they win through their economies of scale and sheer billions they are able to pour into R&D. But there are 20 large automakers in the world, there is good money to be made betting 15 of them will go bankrupt in the next 20 years leaving only the 5 biggest ones. What they would love more than anything is to increase supply and smash their competition (who are similarly supply constrained) and I can guarantee you every automaker is working 24/7 on getting more cars onto dealer lots to alleviate the shortages even if it lowers prices. Tesla in particular have done amazing work in their supply chains, being one of the only automakers with the ability to increase production in 2021/2022. Many companies are looking to emulate what Tesla is doing with vertically integrating their supply chains to insulate them from supply side shocks like what just happened with Covid.

(anyway, just my view from one industry... undoubtedly the view is different in other industries)
posted by xdvesper at 4:05 PM on October 20, 2022 [31 favorites]

Econonomics is just a spin on finding out how close to slavery you can get before you get open revolt. Supply and demand boil down to, "How much can I hurt this other person before they die or give up on civilized conduct", and I put no stock in it. Higher car prices are absolutely not a short term thing. This is a big experiment in how much an industry can hurt peple and get away with it.

Eat the fucking rich.


To rant further, capitalism is amoral. Yes, morals are completely artificial. Their only purpose is to keep us from turning into chimps and lapsing into violence and anarchy. Economics is an attempt to explain and predict exactly how close we can get to that dividing line without crossing it. Just because it tries to absolve us of culpability doesn't mean we shouldn't try to do better, because not doing better leads to companies charging as much as they can, which leads to inflation, which leads to the stock market crash we're currently experiencing, which is leading to higher interest rates, which will lead to more unemployment, which leads to more misery, which will probably lead to a rise in authoritarianism, which will kill a lot of people.

Doing the moral thing, and upholding the rule of law for the rich isn't about pleasing god, being "right", or some idiotic thing like that, it's about preventing a whole fuckton of chaos, misery, and death.
posted by fnerg at 4:22 PM on October 20, 2022 [4 favorites]

For certain products (such as automotive, which xdvesper talked about), yeah, supply chain problems are fucking with stuff. But note that the automotive sector is (by modern standards), incredibly competitive.

Groceries? Not so much, and I don't think they're particularly hard-hit by, say semiconductor shortages. I happen to drink too much pop/soda, and prices in that area have gone up 40-50% in the last year--a product where input costs are a tiny fraction of the price. It's also an area where there are only two basic companies in the US, and when one announces pricing changes, the other moves in lockstep.

tl;dr: There are a few places where there are real cost pressures, but a lot of corporations are using headlines about inflation as an excuse to gouge.
posted by Ickster at 8:34 PM on October 20, 2022 [5 favorites]

Yeah, "well, duh!"
posted by porpoise at 8:40 PM on October 20, 2022

The Truth About Inflation by Blair Fix

"Inflation is always and everywhere a redistributional phenomenon." — Jonathan Nitzan (thesis, thread)
posted by jeffburdges at 8:44 PM on October 20, 2022

The Truth About Inflation by Blair Fix

I'd feel a lot better about someone's hot takes about what the CPI really means if they knew really basic facts, like (figure 4) that there are 8 not 12 major groups in the CPI. Or if they had the common sense to think that if there were 12 major groups in the CPI, one of them probably wouldn't be "Men's and boy's apparel" with no mention elsewhere of apparel for anybody else.

Or if they didn't consider CPI meaningless because there is wide variation between individual items in the CPI. That's only a valid criticism to the extent that there are people who only purchase a single item in the CPI; someone who only buys beef roasts, or whiskey, or gasoline, or veterinarian services. Comparing my wealth to Jeff Bezos' wealth to draw some average about our joint wealth is meaningless, because I don't have access to Jeff Bezos' wealth, and he doesn't have access to mine. Our wealth levels are independent.

But in the real world, households universally buy a mix of many of the items in the CPI; food, housing, clothing, transportation, medical care, recreation, education and communication, and so on. No one has the luxury to say "well, I only buy ship's fare, which is down 3% year-on-year, so I'm not having any inflation"; equally, no one has the misfortune to only be buying margarine and experience the 44% inflation it has. They also buy the individual CPI items in different amounts; the fact that margarine is up 44% is less important to most households than the fact that gasoline is up 18%.

There exists an interesting potential blog post where someone creates a counterfactual looking at variability between actual household consumption patterns, to develop a sense of what the variance in the CPI actually would be for a range of different households, and then draw a conclusion on whether treating inflation as a constant rate across households is meaningful or not. That would be more difficult, it would probably take up some of the time one could spend shit-talking.

He writes So perhaps economists know that inflation varies slightly between commodities, but they also know that this variation is so small that it’s not worth reporting. ... Although it certainly seems dubious that price-change variation is rarely reported, perhaps we can think of a good reason not to worry about it. and so on.

Here's an excerpt from the latest CPI news release:
Increases in the shelter, food, and medical care indexes were the largest of many contributors to the monthly seasonally adjusted all items increase. These increases were partly offset by a 4.9-percent decline in the gasoline index. The food index continued to rise, increasing 0.8 percent over the month as the food at home index rose 0.7 percent. The energy index fell 2.1 percent over the month as the gasoline index declined, but the natural gas and electricity indexes increased.
This is not a buried footnote; it's the second fucking paragraph. Sure sounds like economists reporting on price change variation to me! And then (after two more paragraphs describing variation in inflation by commodity groups) there follows table after table after table showing all the different price changes and how much they vary.
posted by Superilla at 12:27 AM on October 21, 2022 [2 favorites]

a product where input costs are a tiny fraction of the price. It's also an area where there are only two basic companies in the US, and when one announces pricing changes, the other moves in lockstep.

So there's two things to address here.

1. Input costs are irrelevant for pricing. Say I'm a landlord and I pay a mortgage (cost) and I rent the property out to tenants. It doesn't matter whether my mortgage is $20,000 per year, $10,000 per year, or $0 per year - I'm always going to rent it out at the best rate I can get. If the market rate is $15,000 and my mortgage is $20,000? Well I'm going to rent it out at $15,000 and eat the $5,000 loss, it's better than taking a $20,000 loss. What if my mortgage is $0, would I then rent it out at $1,000? No I wouldn't, I'd still rent it out at $15,000.

2. Ah but what if you have significant price setting power? Then you'd already be in a position to have computed the optimal price / volume combination that yields the most profit for your company. From that optimal price, moving to a higher price would be a loss to you despite the gain in volume, and moving to a lower price would also be a loss despite the rise in volume. If a firm is increasing prices by 50% now, rather than 10 years ago, it's due to immediate factors beyond its control, particularly due to the multi-step retailing process. If they (and their competitors) can't supply enough product to meet its optimal price / volume combination, then as supply drops prices will go upwards and they eat a loss.

This is the Coca Cola's latest Q2 2022 report and for Q2 they are reporting a 22% decline in operating income vs previous quarter and a 37% decline year on year (from their 10-Q report). I'm not familiar with the industry, but their PE ratio of 25 indicates they're making a 4% per year, which is hardly anything to shout about. As interest rates rise you'd probably get better returns in the bank...
posted by xdvesper at 1:15 AM on October 21, 2022 [2 favorites]

If a firm is increasing prices by 50% now, rather than 10 years ago, it's due to immediate factors beyond its control, particularly due to the multi-step retailing process.

Except where those "factors beyond its control" may have been market competition. That's why the Kroger-Albertsons merger is such a concern.
posted by explosion at 10:14 AM on October 21, 2022 [1 favorite]

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