Not Very Sophisticated Thinking About Inflation
A story in yesterday’s Wall Street Journal reminds us how even financial journalists may fail to go past common intuitions if not superstitions about inflation—or at least don’t ask all the questions that a familiarity with economic analysis suggests. “Some economists,” we are told, think that businesses are using inflation to “opportunistically” boost their profits, thereby fueling inflation in return (“Why Is Inflation So Sticky? It Could Be Corporate Profits,” May 2, 2023).
If inflation is caused by businesses raising their profits, why didn’t they do that before inflation? Because they did not expect their competitors to do the same, the story suggests. But if that is true, it means that businesses are not raising their profits now just because they suddenly want to (they were not greedy before!), but because it is increased market demand that is pushing up prices and short-term profits at the same time.
Aren’t consumers as greedy as businesses? So why aren’t they forcing businesses to cut or cap their prices? Same answer: because markets don’t allow it, that is, consumers are the ones bidding up prices, just as employees are responding to the bidding up of wages on labor markets.
But why are consumers suddenly bidding up prices? Why are businesses suddenly bidding up wages? Could it be that central banks (the Fed in the United States) have increased the money supply, in large part to finance the jump in government deficits? And why would a report in a financial newspaper not at least mention the existence of a respected monetary theory of inflation according to which the phenomenon is due to more money chasing the same quantity of goods?
In early 2021, after three years during which the Fed had increased the money supply (M2) by about 50%, chairman Jerome Powell declared:
Right now, I would say the growth of M2, which is quite substantial, does not really have important implications for the economic outlook.
Both economic history and theory strongly suggest it was not just a bad luck. (The Fed has since pushed down the money supply, partly repairing its error, at a cost.)
On corporate profits and inflation, The Economist shows more sophistication than the Wall Street Journal. The venerable British magazine writes (“Are Greedy Corporations Causing Inflation,” April 30, 2023):
People are looking for someone to blame—and corporations are often top of the list. According to a recent survey by Morning Consult, a pollster, some 35% of Americans believe that “companies’ attempts to maximise profits” have contributed “the most” to inflation, more than any other factor by far. … Arguments for “greedflation” rest on unsure theoretical ground. Companies did not suddenly become avaricious. … If you are fuming at paying $10 for a coffee, blame the barista serving it to you as much as the owner.
According to the monetary theory of inflation, however, baristas are not to blame either.