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Telling the Truth about Inflation

And why that's a big mistake

The Biden White House has decided to stop tying inflation to corporate power. That’s a big mistake. I’ll get to the reason for the White House’s shift in a moment, and why it’s a mistake. First, I want to be clear about the relationship between inflation and corporate power.

Corporate power and rising prices

While most of the price increases now affecting the US and global economy have been the result of global supply chain problems, this doesn’t explain why big and hugely-profitable corporations are passing these cost increases on to their customers in the form of higher prices. They don’t need to do so: With corporate profits at near record levels, they could easily absorb the cost increases. They’re raising prices because they can, and they can because they don’t face meaningful competition. As the White House’s National Economic Council put it in a December report:

Businesses that face meaningful competition can’t do that, because they would lose business to a competitor that did not hike its margins.

Starbucks is raising its prices to consumers, blaming the rising costs of supplies. But Starbucks is so profitable it could easily absorb these costs (it just reported a 31 percent increase in yearly profits). Why didn’t it just swallow the cost increases?

McDonald’s and Chipotle have increased their prices, also blaming higher food and labor costs. But McDonald’s revenues hit a five-year high in 2021 and Chipotle’s revenues increased by over a third from two years before. Why didn’t they absorb the cost increases?

Procter & Gamble is charging more for consumer staples, citing “rising costs for raw materials, such as resin and pulp, and higher expenses to transport goods.” But P&G continues to rake in record profits. It’s even been spending billions buying back its own stock. Why didn’t it just absorb the cost increases?

And on it goes. America’s largest and most profitable retailers Walmart, Amazon, Kroger, Costco, and Target  say they must raise their prices because the products they’re selling cost more. But these retailers are so profitable they could absorb much of the cost increases and be profitable with smaller markups. Why didn’t they?

The answer in all these cases is they didn’t absorb the costs — and instead passed them on to consumers in the form of higher prices — because they face so little competition. Market power allows them to keep high profit margins even in the face of rising costs. As Chipotle’s chief financial officer said, “our ultimate goal … is to fully protect our margins.”

Some economists argue that corporate power can’t be driving inflation because any corporation with the market power to raise prices would already have done so. (This reasoning is roughly analogous to the old story about two economists who were walking along a street when one says “look! There’s a ten dollar bill!” and the other says “don’t be silly. If there were a ten dollar bill, someone would have picked it up by now.”) Corporations are raising prices now because their costs are increasing now. They’re using their market power to pass on these rising costs to their customers.

That’s not all. Inflation has given some big corporations cover to increase their prices well above their rising costs.

Almost 60 percent of large retailers say inflation has given them the ability to raise prices beyond what’s required to offset higher costs.

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On a recent survey, almost 60 percent of large retailers say inflation has given them the ability to raise prices beyond what’s required to offset higher costs.

Meat prices are soaring because the four giant meat processing corporations that dominate the industry are “using their market power to extract bigger and bigger profit margins for themselves,” according to a recent report from the White House’s National Economic Council (emphasis added).

Not incidentally, that report was dated December 10. Now, the White House is pulling its punches.

So why has the White House stopped explaining this to the public?

According to Thursday’s Washington Post, when the prepared congressional testimony of a senior administration official (Janet Yellen? The President?) was recently circulated inside the White House, it included a passage tying inflation to corporate consolidation and monopoly power. But that language was deleted from the remarks before they were delivered.

According to two people aware of the matter who spoke on the condition of anonymity, members of the White House Council of Economic Advisers raised objections. I don’t care what their objections were but as I’ve said, some economists argue that since corporations with market power wouldn’t need to wait until the current inflation to raise prices, corporate power can’t be contributing to inflation. This argument ignores the ease by which powerful corporations can pass on their own cost increases to customers in higher prices or use inflation to disguise even higher price increases.

The Council of Economic Advisers is likely being influenced by two Democratic economists from a previous administration. According to the Post, former Democratic treasury secretary Larry Summers and Jason Furman, a top economist in the Obama administration, have been critical of attempts to link corporate market power to inflation.

“Business bashing is terrible economics and not very good politics in my view,” Summers said in an interview.

Wrong. Showing the connections between corporate power and inflation is not “business bashing.” It’s holding powerful corporations accountable. Whether through antitrust enforcement (or the threat of it), a windfall profits tax, or price controls, or all three, it’s important for the administration and Congress to do what they can to prevent hugely-profitable monopolistic corporations from raising their prices.

Robert Reich

Otherwise, responsibility for controlling inflation falls entirely to the Federal Reserve, which has only one weapon at its disposal — higher interest rates. Higher interest rates will slow the economy and likely cause millions of lower-wage workers to lose their jobs and forfeit long-overdue wage increases.

Robert Reich

Crossposted with permission from Robert Reich's Newsletter.