A fresh round of US inflation data released last week showed persistently high prices, raising more questions about whether the Federal Reserve’s interest rate hikes are missing what many economists contend are the real inflationary culprits: corporate pricing, energy costs and supply chain disruptions.
The news is further stirring fears of unnecessary economic pain should the Fed push America into recession.
“Raising interest rates isn’t working, and the Fed’s overly aggressive actions are shoving our economy to the brink of a devastating recession,” said Rakeen Mabud, chief economist at the progressive Groundwork Collaborative thinktank. “Supply chain bottlenecks, a volatile global energy market and rampant corporate profiteering can’t be solved by additional rate hikes.”
The Fed and some economists maintain that demand generated by a hot labor market and higher wages are driving inflation, and higher unemployment and interest rates are panaceas.
To that end, the Fed has hiked rates five times in 2022 and indicated more increases are to come, moves the Federal Reserve board chair, Jerome Powell, has acknowledged will “bring some pain” to households and businesses.
Data shows the Fed is making some progress in its aim: mortgage rates are soaring and home sales are plummeting. Meanwhile, the latest employment numbers show a sharp decline in job openings, as well as slowing job and wage growth.
But Thursday’s Consumer Price Index numbers for September revealed the approach has yielded few gains on pricing. Inflation inched up to 8.2%, while month-to-month it climbed 0.1% in August and 0.4% in September.
The price drops aren’t materializing because current inflation largely isn’t demand- or labor-driven as it often is during inflationary periods, said Claudia Sahm, a former Fed economist and founder of Sahm Consulting.
“High inflation is not workers’ fault, but the Fed is waging a war on US workers,” Sahm said.
Lael Brainard, Federal Reserve Board vice chair, even acknowledged the roles of pricing and supply chain disruptions during a speech this week before the National Association for Business Economics. Retail profit margins have increased 20% since the pandemic’s onset, Brainard noted, roughly doubling the 9% increase in average hourly earnings by the sector’s employees.
In the auto sector, margins for vehicles sold at dealerships have increased by more than 180% since February 2020 – about 10 times the rise in the sector’s average hourly earnings, Brainard said.
“The return of retail margins to more normal levels could meaningfully help reduce inflationary pressures in some consumer goods,” she added.
‘Fatter margins’
An April analysis by the Economic Policy Institute, a progressive economic think tank, put numbers behind the theory that corporate pricing is an inflationary driver.
Prices have risen at an annualized rate of over 6% since 2020’s second quarter compared with 1.8% during the pre-pandemic business cycle of 2007-2019. EPI broke prices in the non-financial corporate sector into three main components: labor costs, non-labor inputs and profit margins.
Over half of the Covid recovery era increase “can be attributed to fatter profit margins” while labor costs represented less than 8%, the report’s author, Josh Bivens, wrote.
That’s nearly an exact flip of what was seen in the decades leading up to Covid, the report found.
“Companies are taking higher inputs, putting a bigger markup on them than they were previously, then passing that on to customers,” Bivens said.
An April Guardian analysis of 100 top corporations SEC filings found 80 had increased net profits between 2019 and the corresponding quarter in 2021 or 2022, while inflation had eaten into most workers’ wage gains.
Skyrocketing demand for durable goods coupled with supply chain problems has created “enormous pricing power” for companies that had stock on hand, Bivens said. Typically corporations attempt to widen margins by suppressing wages, but that changed during the Covid recovery, he added.
The situation is ever-evolving. Wages are falling, which should mean people are buying less and eroding corporations’ pricing power, Bivens said, and some supply chain issues are resolving themselves – the cost of some shipping containers is down by 64% from the same week last year.
The producer price index, which tracks business inputs cost, showed deflation in July and August. It increased by 0.4% in September, but with food and energy excluded, it remained flat.
“That also supports the profiteering theory,” said Lindsay Owens, Groundwork Collaborative’s executive director. “We see input costs cooling more than consumer prices and companies aren’t giving that pricing back to the consumer, or at least not yet.”
Companies should “eventually” pass lower input costs on to consumers, Sahm said as marking down prices is “a really good way to draw in customers”. Moreover, shareholders could ultimately be shooting themselves in the foot by relentlessly pressuring companies to increase prices, she added.
But in earnings calls, at least some executives have said they are not yet ready to lower prices, and told shareholders they plan to keep prices high as long as customers absorb them.
“You’re not going to see a lot of companies chasing volume by discounting prices,” a Colgate executive told shareholders in July while assuring them prices will remain high for now.
How to lower inflation
Observers say few politically palatable quick fixes exist, especially around curbing corporate pricing power.
Many supply chain issue resolutions are geopolitically difficult, Sahm said, like the US push for a cap on Russian oil prices. The US could also ban oil exports to bring down the cost of fuel here, she added, but doing so 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 do we get Europe through the winter?” Sahm said.
The Biden administration’s most meaningful step to address soaring energy costs has been a new plan to wield the Strategic Petroleum Reserve – the nation’s reserve of crude oil – as a price control tool by effectively setting a floor and ceiling on the price of oil.
Petroleum companies have said they are intentionally keeping production low and prices high because shareholders lost so much money in recent years in the oil market’s boom-bust cycles. The Biden plan aims to bring stability to the market and incentivize production increases.
Meanwhile, the US Department of Justice has launched a price fixing investigation into the meat packing industry, and new US Department of Agriculture rules are designed to promote competition in it. The bipartisan Chips Act and Ocean Shipping Reform Act could help ease some supply chain issues, observers say.
But such measures are far short of those taken or seriously discussed in Europe, where the EU and UK have instituted windfall taxes on oil, gas and clean energy companies’ profits. Meanwhile, hard price caps seem to be more palatable as the EU heads into winter facing a natural gas crisis. Such measures simply do not have enough political support in the US.
The Fed is restricted to monetary policy and can’t directly do anything 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 US and other central banks go at it alone, then consequences will likely be dire and reach around the world, she added.
“This could result in global recession, sovereign debt defaults, bankruptcies, et cetera, and we are quite concerned because we really haven’t seen this movie before so we don’t know how it ends,” Owens said.
• This article was amended on 17 October 2022. An earlier version misnamed the Strategic Petroleum Reserve as the “Standard Petroleum Reserve”.
