Corporate greed may not be the sole reason for rising inflation rates.

Another perspective suggests that the primary driver of inflation is not corporate greed.

New findings from the Federal Reserve Bank of San Francisco question the notion of greedflation as a cause of the inflation surge between 2021 and 2022.

The economists at the bank discovered that while some firms used their pricing power to increase prices above production costs (markups), this was not the primary reason for the inflation spike. Markups rose significantly in sectors such as gasoline, cars, and general merchandise, as well as repair, laundry, personal care, and other services in 2021, according to the report.

'No cause for concern'

Despite this, when examining markups across the entire economy, the Federal Reserve researchers found that price gouging did not primarily account for the recent increase and subsequent decline in inflation. The paper concluded that aggregate markups, the more appropriate measure for overall inflation, haven't changed much since the economic recovery began.

This contradicts a popular argument made by some progressives, like Senator Elizabeth Warren, who have linked rising inflation to corporate greed. Warren has argued that high prices are not simply due to the pandemic or some unavoidable economic force. Instead, she claims it's "greed – and in some cases, it is flatly illegal."

Similarly, President Joe Biden has also blamed corporate greed, citing "price gouging, junk fees, and greedflation."

However, these arguments face a challenge with the new Fed research, which does not directly contradict the claims but undercuts them.

A White House spokesperson told CNN that the study supports the notion that "record profits are increasing inflation in some sectors, such as gas and general merchandise." They added that "if corporate profits came back to earth, prices could come down."

'Scapegoating corporations'

The debate arises as inflation remains a major concern for Americans and a significant political challenge for Biden ahead of the November election. Consumer sentiment, a key metric monitored by the White House, dropped sharply in May, reaching a six-month low. It marked the steepest decline in nearly three years, driven by concerns about inflation and interest rates.

Greg Valliere, chief US policy strategist at AGF Investments, noted that the White House is "desperate to blame someone or something for inflation." He described the search for scapegoats as unproductive and stated that there's no quick fix other than the potentially painful option of increasing interest rates, which the Federal Reserve is considering.

Critics of the greedflation theory argue that the recent inflation surge had more traditional causes, such as higher production costs related to shifting demand patterns and ongoing supply problems due to the pandemic.

The battle against inflation has seen progress, as the rate of annual inflation dropped from a peak of 9% in June 2022 to the low-to-mid 3% range. However, the pace of progress has slowed recently, with prices increasing more than expected during the last three months. Inflation remains above the Federal Reserve's 2% target, making it difficult to return to normal rates.

Despite this, Federal Reserve Chairman Jerome Powell stated on Tuesday that it would likely take longer for the central bank to conclude that inflation is returning to the desired level.

It is important to note that the SF Fed report does not directly refute the greedflation theory but casts doubt on its significance. Other research has offered a more mixed view on the subject.

Image: Image

Header: This World Bank Group image shows President Biden speaking with workers and officials at the Norfolk Southern Corp. in February 2023. Credit: Federal Reserve Bank of San Francisco via Reddit

List: List of recent inflation levels

June 2022: 9%
May 2023: 3% (low-to-mid range)
April 2023: 3% (low-to-mid range)
March 2023: 3%
February 2023: 3%
January 2023: 3%
December 2022: 3%
November 2022: 3%
October 2022: 3%
September 2022: 3%
August 2022: 3%
July 2022: 3.7%
June 2022: 9% (peak)

Link: Link to President Biden's January 2023 State of the Union address

Highlighting: Highlighting a sentence about the Federal Reserve Chairman's remarks

Instead, consider a progressive organization known as Groundwork Collaborative, which claimed that corporate profits triggered 53% of inflation in the second and third quarters of 2023. The study revealed that corporate profits accounted for 34% of overall inflation since the onset of Covid-19.

In response, Caroline Ciccone, Accountable.US president, made a statement: "Americans understand the idea of price-gouging, and that's why they attribute high prices to corporate greed. It's strange when companies with skyrocketing profits, wealthy investors, and enormous CEO bonuses claim they couldn't control rising costs. These corporations could've shared their prosperity with consumers via reasonable and stable prices—but instead, many opted to exploit the situation for continuous profit."

The Federal Reserve Bank of Kansas City study in the previous year discovered that corporate profits constituted 41% of inflation in the initial two years of the Covid recovery.

However, the same Kansas City Fed document mentioned that this isn't extraordinary. Consequently, during previous economic recoveries, corporate profits contributed to a broader average of 59% of overall inflation.

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Despite the White House's assertion that high corporate profits are contributing to inflation in certain sectors, the Federal Reserve research suggests that this is not the primary driver of the recent inflation spike and subsequent decline.

Businesses, including those in the energy and general merchandise sectors, did increase prices above production costs in 2021, contributing to rising markups. However, the new Fed research indicates that this was not the primary cause of the overall inflation surge.

Source: edition.cnn.com