A new round of U.S. inflation data released last week showed persistently high prices, raising more questions about whether the Federal Reserve’s interest rate hikes are missing the mark. that many economists see as the real culprits of inflation: business prices, energy costs and supply chain disruptions.
The news further stokes fears of unnecessary economic pain if the Fed pushes America into recession.
“Raising interest rates isn’t working, and the Fed’s overly aggressive actions are pushing our economy to the brink of a devastating recession,” said Rakeen Mabud, chief economist at the progressive think tank Groundwork Collaborative. “Supply chain bottlenecks, a volatile global energy market and runaway corporate profits cannot be solved by further rate hikes.”
The Fed and some economists argue that the demand generated by a boiling labor market and higher wages are the cause of inflation, and that higher unemployment and interest rates are panaceas.
To that end, the Fed has raised rates five times in 2022 and signaled that more increases are coming, Federal Reserve Board Chairman Jerome Powell acknowledged, “will be a little painful” for households and businesses.
The data shows that the Fed is making progress on its target: mortgage rates are skyrocketing and home sales are falling. Meanwhile, the latest employment figures show a sharp decline in job vacancies, as well as slowing job and wage growth.
But Thursday’s Consumer Price Index figures for September showed the approach produced little price gain. Inflation edged up to 8.2%, while month-on-month it rose 0.1% in August and 0.4% in September.
Price cuts don’t materialize because current inflation is largely not driven by demand or labor, as is often the case during times of inflation, Claudia said. Sahm, former Fed economist and founder of Sahm Consulting.
“High inflation is not the fault of workers, but the Fed is waging a war on American workers,” Sahm said.
Lael Brainard, Vice Chairman of the Federal Reserve Board, even acknowledged the role of prices and supply chain disruptions during a speech this week before the National Association for Business Economics. Retailer profit margins have increased 20% since the start of the pandemic, Brainard noted, roughly doubling the 9% increase in average hourly earnings for employees in the sector.
In the automotive sector, margins for vehicles sold at dealerships have increased more than 180% since February 2020, about 10 times the rise in the industry’s average hourly wage, Brainard said.
“The return of retail margins to more normal levels could contribute significantly to reducing inflationary pressures on certain consumer goods,” she added.
An April analysis by the Economic Policy Institute, a progressive economics think tank, put numbers behind the theory that corporate prices are driving inflation.
Prices have risen at an annualized rate of more than 6% since the second quarter of 2020, compared to 1.8% during the pre-pandemic economic cycle of 2007-2019. The IPS has divided prices in the non-financial business sector into three main components: labor costs, non-labour inputs, and profit margins.
More than half of the increase in the Covid recovery era “can be attributed to higher profit margins” while labor costs accounted for less than 8%, the author wrote. report, Josh Bivens.
It’s almost an exact reversal of what was seen in the decades leading up to Covid, according to the report.
“Companies take higher inputs, impose a bigger profit margin on them than before, and then pass it on to customers,” Bivens said.
An April Guardian analysis of the top 100 companies filed with the SEC found that 80 increased their net profits between 2019 and the corresponding quarter in 2021 or 2022, while inflation ate away at the wage gains of most workers. .
Soaring demand for durable goods, coupled with supply chain issues, created “enormous pricing power” for companies that had inventory, Bivens said. Typically, companies try to widen their margins by cutting wages, but that has changed during the Covid recovery, he added.
The situation is constantly changing. Wages are falling, which should mean people are buying less and eroding companies’ pricing power, Bivens said, and some supply chain issues are resolving themselves — the cost of some shipping containers is down 64% compared to the same week last year.
The producer price index, which tracks the cost of business inputs, showed deflation in July and August. It increased by 0.4% in September, but excluding food and energy, it remained stable.
“It also confirms the profit theory,” said Lindsay Ownes, executive director of Groundwork Collaborative. “We’re seeing input costs come down more than consumer prices and companies aren’t feeding those prices back to the consumer, or at least not yet.”
Companies should “eventually” pass on lower input costs to consumers, Sahm said, because lower prices are “a really good way to attract customers.” Moreover, shareholders could end up shooting themselves in the foot by relentlessly pressuring companies to raise prices, she added.
But on earnings calls, at least some executives said they weren’t ready to cut prices just yet and told shareholders they planned to keep prices high as long as customers absorbed them.
“You’re not going to see a lot of companies chasing volume by cutting prices,” said a Colgate executive. told shareholders in July while assuring them that prices will remain high for now.
How to lower inflation
Observers say there are few politically acceptable quick fixes, especially to limit corporate pricing power.
Many supply chain resolutions are geopolitically difficult, Sahm said, such as the U.S. push for a cap on Russian oil prices. The United States could also ban oil exports to bring down the cost of fuel here, she added, but that would devastate Europe.
“The most important things we are doing right now to fight inflation are these geopolitical decisions: how do we get Russia out of Ukraine? How to get Europe through winter? Sahm said.
The Biden administration’s most significant step to address soaring energy costs was a new plan to use the standard oil reserve – the National Crude Oil Reserve – as a price control tool in effectively setting a floor and a ceiling on the price of oil.
Oil companies said they were intentionally keeping production low and prices high because shareholders had lost a lot of money in recent years in oil market booms and busts. The Biden plan aims to stabilize the market and encourage production increases.
Meanwhile, the US Department of Justice has launched an investigation into price-fixing in the meatpacking industry, and new US Department of Agriculture rules are designed to promote competition in this industry. sector. The bipartisan law on potato chips and Shipping Reform Act could help alleviate some supply chain issues, observers say.
But such measures are a far cry from those taken or seriously discussed in Europe, where the EU and UK have instituted windfall taxes on the profits of oil, gas and clean energy companies. Meanwhile, strict price caps appear to be more palatable as the EU heads into winter in the face of a natural gas crisis. Such measures simply do not have enough political support in the United States.
The Fed is limited to monetary policy and can’t do anything directly about corporate pricing or supply chains, though Powell “could be more vocal” in public about the need for a holistic approach, Owens said. If the United States and other central banks go it alone, the consequences are likely to be disastrous and affect the whole world, she added.
“It could lead to a global recession, sovereign debt defaults, bankruptcies etc. and we are very concerned because we really haven’t seen this movie before so we don’t know how it ends” , said Owens.