It is popular lately to blame rising prices on corporate greed. While layering the blame unilaterally across the business-people of the country makes for a convenient scapegoat, it is much more likely that something else is happening.
A hunt for the actual source of the prices increases is much more than a game of political folly. It is vitally important. As until things are fixed at the actual source, the inflation will continue. And it is the retirees on fixed incomes and salaried employees (who are often lower and middle-income stuck with their wages rising slower than prices) who are hurt the most.
This isn’t sustainable in the long run, and producers will need to further increase their prices to consumers at some point.
First, we must question a key assumption of the corporate greed argument. For corporate greed to be the culprit would mean a large majority of business-people suddenly started getting greedier than they were before 2021. While that is a stretch, some will use COVID to conflate cause and effect. They will say that because of COVID, business owners suddenly saw new opportunities to raise prices and took advantage of them. It is unclear how COVID could have suddenly given businesses across all industries the ability to raise prices beyond what consumers were willing to pay. It is plausible, however, that consumers purchasing fewer things during lock-downs would shift the demand curve to the left and create lower prices. And when lock-downs are over, pent-up demand could temporarily move the demand curve further to the right than it originally was – thereby creating temporary higher prices. But this wouldn’t be an act of spontaneous corporate greed. Instead, it would be a very natural phenomenon of markets clearing after a shock to the system.
Second, the data shows the opposite of corporate greed playing out. The Producer Price Index (PPI) which “measures the average change over time in the selling prices received by domestic producers for their output.” Has been steadily increasing by more than the Consumer Price Index (CPI). Figure 1 below shows a steady and increasing gap between the two indexes over the last 14 months. Producers have had their own costs increase by more than what they are charging to customers.
Figure 1 - Source BLS.gov
Instead of producers getting greedier and making more money for themselves, government data shows they are the ones being squeezed. Producers likely believed the increasing costs in 2021 were transitory and preferred a temporary margin hit over frustrating their customers. This isn’t sustainable in the long run, and producers will need to further increase their prices to consumers at some point. This isn’t because of greed, but because of a need to keep pace with the prices they are being charged.
So, if greed isn’t causing all of this, what is? The answer is complex and confusing, but it is almost certainly not as simple as a spontaneous increase in greed last year that can be remedied with a few regulations and executive orders.
While market pricing has been exacerbated recently by COVID and the Russia/Ukraine war, one prominent dynamic was going on long before either of these: the rapid increase of the money supply.
Between the 2008 financial crisis and December of 2019 the Federal Reserve had tripled the money supply. The additional cash sat largely as newly created bank reserves and never was fully deployed to the economy. This can be seen in the growth of the Federal Reserve’s M1 in Figure 2, which is their most liquid measure of the number of dollars in existence.
Figure 2 - Source: https://fred.stlouisfed.org/series/M1SL
But this pales in comparison to what happened in 2020. The growth of M1 has literally been “off the charts” since then (it is so large that we need to drastically change the scale to show on a chart like the one in Figure 2). In response to the COVID pandemic, the Federal Reserve took the already tripled M1 and quadrupled it in less than a year.
Figure 3 - Source: https://fred.stlouisfed.org/series/M1SL
Nearly every economics textbook will tell us that an increase in money supply will cause an increase in prices. Traditional definitions of inflation define it as an increase in the money supply. The increase in prices is just the effect. The inflation has already happened. We are now just watching the price change effects as they ripple through the economy.
It would be nice if the effect on prices of increasing the money supply were immediate and equally applicable to all people. Unfortunately, this takes time and benefits certain classes while hurting retirees and lower-income wage earners. One of the insidious consequences of inflation is its hidden ability to grow the gap between the rich and poor without the public understanding who to blame.
If the COVID response were a one-time effect, then we could deal with the repercussions for a few years and be done. But unfortunately, the spigot is still very open. As Figure 3 shows, M1 growth is still following a similar slope to what it has before COVID. Politicians love this as it allows them to promise things well beyond what tax revenue will allow and simply print the money to cover it. Using “greedy” business-people as scapegoats allows the game to continue. But none of this stuff is free. What we don’t pay for in taxes, we’ll pay for as the value of the dollars in our pockets is inflated away. And until this spigot is closed, the price increases will continue.