By PAUL WISEMAN, AP Economics Writer
WASHINGTON (AP) — Infuriated by rising gas station and grocery store prices, many consumers feel like they know who to blame: greedy businesses that relentlessly jack up prices and pocket the profits.
In response to that sentiment, the Democratic-led House of Representatives last month passed on a party-line vote (most Democrats for, all Republicans opposed) a bill designed to crack down on the alleged price increase by energy producers.
Similarly, Britain last month announced plans to impose a temporary 25% windfall tax on the profits of oil and gas companies and funnel the profits to financially distressed households.
Despite public resentment, however, most economists say that corporate price gouging is at most one of the many causes of runaway inflation, not the main one.
“There are much more plausible candidates for what is happening,” said José Azar, an economist at Spain’s University of Navarra.
They include: Robust spending by consumers. Supply interruptions in factories, ports and loading yards. Shortage of workers. President Joe Biden’s huge pandemic relief program. Closures caused by COVID 19 in China. Russia’s invasion of Ukraine. And, not least, a Federal Reserve that kept interest rates ultra-low for longer than experts say it should have.
The blame game is intensifying, if anything, after the US government reported that inflation hit 8.6% in May from a year earlier, the biggest price rise since 1981.
To fight inflation, the Federal Reserve is now aggressively tightening credit overdue. On June 15, it raised its short-term benchmark rate by three-quarters of a point, its biggest hike since 1994, signaling that more major rate hikes are on the way. The Fed hopes to pull off a notoriously difficult “soft landing”: slowing growth enough to curb inflation without sending the economy into recession.
For years, inflation hovered at or below the Federal Reserve’s 2% annual target, even as unemployment sank to a half-century low. But as the economy bounced back from the pandemic recession with surprising speed and strength, the US consumer price index rose steadily, from a 2.6% year-on-year rise in March 2021 to a record high. four decades last month.
For a time at least, before profit margins for S&P 500 companies fell earlier this year, rising inflation coincided with rising corporate profits. It was easy for consumers to connect the dots: the companies, it seemed, were involved in the price gouging. This was not just inflation. It was greed.
When asked to name the culprits behind rising gasoline prices, 72% of 1,055 Americans surveyed in late April and early May by the Washington Post and George University’s Schar School of Politics and Government Mason blamed for-profit corporations, more than the proportion who pointed to Russia’s war on Ukraine (69%) or Biden (58%) or pandemic disruptions (58%). And the verdict was bipartisan: 86% of Democrats and 52% of Republicans blamed corporations for inflated gas prices.
“It’s very natural for consumers to see prices go up and get angry about it and then look for someone to blame,” said Christopher Conlon, an economist at New York University’s Stern School of Business who studies corporate competition. “You and I cannot set prices at the supermarket, the gas station or the car dealership. So people naturally blame corporations, since those are the ones that see prices go up.”
However, Conlon and many other economists are reluctant to prosecute, or favor punishment, corporate America. 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 “unreasonably excessive price” during a market shock, 65% said they would No. Only 5% supported the idea.
Which combination of factors is most responsible for skyrocketing prices “remains an open question,” acknowledges the economist Azar. COVID-19 and its aftermath have made it difficult to assess the state of the economy. Economists today are inexperienced in analyzing the financial consequences of a pandemic.
Policymakers and analysts have been repeatedly surprised by the path the economy has taken since COVID hit in March 2020: They did not expect the quick recovery from recession, fueled by heavy government spending and record Fed-engineered rates. Federal and other central agencies. banks. They were then slow to recognize the growing threat of high inflationary pressures, dismissing them at first as merely a temporary consequence of supply disruptions.
One aspect of the economy, however, is indisputable: A wave of mergers in recent decades has killed or reduced competition among airlines, banks, meatpacking companies and many other industries. That consolidation has given surviving companies the clout to demand price cuts from suppliers, keep workers’ wages low and pass on higher costs to customers who have no choice but to pay.
Researchers at the Federal Reserve Bank of Boston found that less competition made it easier for companies to pass on higher costs to customers, calling it an “amplifying factor” in the resurgence of inflation.
Josh Bivens, research director at the liberal Economic Policy Institute, has estimated that nearly 54% of price increases at nonfinancial firms since mid-2020 can be attributed to “wider profit margins,” compared to just 11 % between 1979 and 2019.
Bivens admitted that neither corporate greed nor market influence has likely grown significantly in the last two years. But he suggested that during the COVID inflation spike, companies have redirected the way they use their market power: Many have stopped pressuring suppliers to cut costs and cap workers’ pay and have instead increased prices for customers.
In a study of nearly 3,700 companies released last week, the left-leaning Roosevelt Institute found that profit and trade margins hit their highest level since the 1950s last year. It also found that companies that had increased aggressively pricing before the pandemic was more likely to do so after it broke out, “suggesting a role for market power as an explanatory factor for inflation.”
However, many economists are not convinced that corporate greed is the main culprit. Jason Furman, one of the Obama White House’s top economic advisers, said some evidence even suggests that monopolies are slower than companies facing stiff competition to raise prices when they raise their own costs, “partly because their prices were high to begin with. ”
Likewise, NYU’s Conlon cites examples where prices have skyrocketed in competitive markets. Used cars, for example, are sold in lots across the country and by numerous individuals. However, average used car prices have soared 16% over the past year. Similarly, the average price of major appliances, another market with many competitors, rose nearly 10% last month from a year earlier.
In contrast, the price of alcoholic beverages increased by only 4% compared to the previous year, despite the fact that the beer market is dominated by AB-Inbev and that of spirits by Bacardi and Diageo.
“It’s hard to imagine AB-Inbev not being as greedy as Maytag,” Conlon said.
So, what has driven the inflation spike the most?
“Demand,” said Furman, now at Harvard University. “A lot of government spending, a lot of monetary support, all combined to support extraordinarily high levels of 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 put money in the pockets of consumers to help them weather the crisis and trigger a spending spree, has pushed inflation up by around 3 percentage points from 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 “major role” in driving up factory costs. They found that it added a staggering 20 percentage points to wholesale inflation in manufacturing last November, taking it to 30%.
Still, even some economists who don’t blame greed for last year’s price rise say they think governments should try to curb the market power of monopolies, perhaps by blocking mergers that reduce competition. The idea is that more companies competing for the same customers would encourage innovation and make the economy more productive.
Still, tougher antitrust policies probably wouldn’t do much to curb inflation anytime soon.
“I find it helpful to think of competition like diet and exercise,” said NYU’s Conlon. “More competition is a good thing. But, like diet and exercise, the benefits are long term.
“Right now, the patient is in the emergency room. Sure, diet and exercise are still a good thing. But we need to deal with the acute problem of inflation.”
AP economics writer Christopher Rugaber contributed to this report.
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