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Inflation in the United States: The Speculation Theory and Market Fears

With prices rising faster in the United States than at any time in four decades, lawmakers are looking for explanations. In recent months, some Democrats point to a new culprit: the speculative increase Of the prices.

The idea is that large companies take advantage of inflation – which has already reached 8.6% annually – to raise prices more than necessary. The White House supports this approach and Democrats in Congress have introduced bills to combat speculative price gouging. Proponents of this theory have come up with a catchy term for this: “greedflation” (greed inflation).

For Democrats, it’s a convenient explanation, as inflation turns voters against President Joe Biden. It allows Democrats to deflect blame from their pandemic relief bill, the American Bailout Plan, which experts say contributed to rising prices. And it allows them to portray inflation as the fault of the monopoly corporations that progressives have long railed against.

Not all progressives agree. Jason Furman, an economist who worked for President Barack Obama, said greed was not a major factor in driving up inflation. He pointed out that focusing on speculative price increases distracted from the real causes and solutions.

But the White House and other lawmakers take the theory seriously. So I want to discuss the arguments for and against the idea that greed inflation drives prices up.

Inflation in the United States, the highest in 40 years. /AFP

The Greed Theory

This is how the side of the greedflation: Inflation rose first due to other factors, such as Covid-19 and economic stimulus laws.

But companies raised prices more than necessary to make higher profits. They knew they could get away with it because consumers no longer had a point of reference for what prices should be. And they didn’t face enough competition to keep prices down.

Proponents of the theory are not claiming that companies have suddenly become more greedy or monopolistic. For decades, company profits increase faster than economic growth and important sectors of the economy, such as retail and finance, have become more concentrated in the hands of a few.

But inflation gives greedy, monopolistic companies a chance to take advantage, said Lindsay Owens, executive director of the left-wing Groundwork Collaborative. Profit “is an accelerator of price increases,” she noted. “It’s not the main cause.”

Owens referenced what companies have said on earnings conference calls in the past year. A Tyson Foods executive said beef price increases not only covered inflation, but “more than offset” rising costs.

Visa’s CEO stated: “Historically, inflation has been a positive for us.” Owens’ organization compiled a list of similar comments from other companies.

Representatives for Tyson and Visa said Groundwork had misrepresented the executives’ comments and taken them out of context.

Beef, one of the products that increased the most in the United States.  Photo: REUTERS

Beef, one of the products that increased the most in the United States. Photo: REUTERS

At the very least, many companies have not been hit hard by inflation. Profit margins for more than 2,000 publicly traded companies last year “increased well above the pre-pandemic average,” according to an analysis by The New York Times.

other visions

You don’t need a speculative rise in prices to explain inflation, and there are other, more accepted explanations, Furman said.

Covid-19 affected supply chains around the world. The Russian invasion of Ukraine triggered another wave of disruption, especially in food and energy.

The stimulus bills left people with a lot of extra money, and many Americans spent it. This caused a excessive demand for too little supply, so prices increased.

More recent events have also weakened the theory of greed inflation. Inflation has remained high: 8.6% in the past year, according to a federal report released last week. But the stock market has crashed; The S&P 500 fell more than 20% below its January high after falling sharply on Monday.

And earnings conference calls have disappointed investors so far this year. If profit-seeking led to more inflation, you wouldn’t expect to see that.

Fuel prices, among those that rose the most in the United States, like the rest of the world.  Photo: REUTERS

Fuel prices, among those that rose the most in the United States, like the rest of the world. Photo: REUTERS

Economic indicators will allow this argument to be tested in the future: if profits fall while inflation remains high, then greed is not likely to be a major cause of rising prices.

The theory of greedflation it also depends on large companies using their enormous market power to raise prices higher than should be possible in a truly competitive economy.

But in some concentrated markets, that hasn’t happened: hospitals are highly amalgamated, yet healthcare prices have risen more slowly than headline inflation in the past year.

Healthcare prices are historically unusual; for most of the last few decades, they have risen faster than inflation. But its recent relative slowdown would indicate that, if greedflation is real, it is not an important factor in all sectors of the economy.

Bottom Line: Speculative price increases could be driving prices up in some places, but it is not universal.

It is also unclear what the progressives’ argument means. Anti-gouging bills introduced in Congress were criticized as impractical or even counterproductive. Better enforcement of antitrust laws – to break up or prevent the creation of monopolistic companies – could help, but only in the long term. While greed inflation explains some of the current problems, it does not offer a clear way out.

Source: The New York Times

Translation: Elisa Carnelli

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