Keystone Research Center released its annual report on the economy, “State of Working Pennsylvania 2022,” on August 30. This is the fifth blog that breaks our report into bite-size pieces. To access the full report and other “State of Working Pennsylvania” resources, please visit our SWPA 2022 Resource page.
This blog focuses on one of the topics on many voters’ minds: inflation. U.S. inflation rose 8.2% in the most recent 12-month period of data, September 2021 to September 2022. Many working families are clearly struggling to make ends meet because of rapid hikes in the prices of fuel, food, rent, and other basics. Yet news reporting has underplayed some dimensions of the inflation story: why it is high; that other countries have even higher inflation; that inflation has moderated recently; that the Federal Reserve Bank expects inflation to drop below 3% next year; and that policies within the recently passed Inflation Reduction Act should help moderate inflation.
Let’s take these points one at a time.
Price gouging and pandemic profiteering: As well as pandemic-induced supply chain bottlenecks, one big driver of inflation has been price gouging by corporations. As Fortune magazine puts it, “U.S. companies post[ed] their biggest profit growth in decades by jacking up prices during the pandemic.” Corporate profits leapt to $2.89 trillion in the most recent four quarters of data available, ending with quarter one in 2022. This equals a 22% increase from $2.37 trillion in 2019. The increase from 2020 to 2021 was the largest since 1976 and the largest after tax since 1948.
Increases in profits due to price gouging can happen in a pandemic through a phenomenon economists call “rockets and feathers,” which is most easily explained with reference to the gasoline market but is also applicable to other markets. When shortages occur, prices go up like a rocket (including on gasoline that gas stations bought at low prices). When shortages abate, prices come down “like a feather” (slowly). In econ-speak, corporations increase their “mark ups” when prices spike because their customers won’t notice as much with prices already rising—i.e., consumers don’t differentiate price gouging from passing on input price hikes. Put most simply, corporations increase their prices and boost profits because they can and because, so far, many are finding consumers are “taking it.”
The Economic Policy Institute estimates that fatter profits accounted for more than half (54%) of accelerating inflation in the non-financial corporate sector from mid-2020 to the end of 2021.
Some CEOs have spoken frankly to investors about the opportunities to raise prices and increase profits in the pandemic and in the context of the Russian invasion of Ukraine. Shell’s CEO said that because of the war in Ukraine, “we are very short refining and we are short products…because a lot of Russian refining capacity is basically locked out.” Shell plowed the resulting bulge in its profits into stock buybacks benefiting executives and wealthy shareholders. An executive at Hormel, the grocery brand processing company, boasted, “I think we’ve done a great job with our pricing,” improving its operating income by 19% in the first quarter of 2022 compared to 2021.
Inflation is higher in Europe: Inflation is now 10.7% in Europe: global factors—not U.S. policy—drive today’s inflation.
Inflation has moderated recently—to an annual rate of 2% since June—but this tends to get ignored because news reports focus on the change over 12 months. (A technical point—if you get lost here, skip to the next paragraph.) The changes over 12 months on which news reports focus don’t have much new information because only two of the 12 monthly increases within that year are different than the 12 monthly increases in the last reported increase over 12 months—the increase in the newest month and the increase in the same month a year earlier, which drops out of the data. What this means, for example, is that the change in reported inflation in September 2022 versus August 2022 depends only on inflation from August to September 2022 and the change from August to September 2021. We’ve known since fall 2021 that reported inflation (over 12 months) in July to September 2022 would be unlikely to fall because the increases in July to September 2021 were small. The October 2022 reported inflation number (over 12 months) is more likely to fall because the increase in October 2021, which will drop out of the 12-month estimate (0.87% in a single month, close to the June 2021 peak increases of 0.88%). The October 12-month inflation number that may well come down will be reported on Thursday, November 10, two days after the election.)
The Federal Reserve projects that inflation will drop below 3% for the full year in 2023 without a recession. Box 1 in “The State of Working Pennsylvania” report explains that the power of workers and unions to win automatic cost-of-living adjustments in their pay packets has diminished since the 1970s. This means that a sustained wage-price spiral is not likely today. In the 1970s, two oil price shocks and shortages of some agricultural commodities triggered this kind of wage-price spiral.
The Inflation Reduction Act (IRA) contains measures that will lower inflation for families. For example, the IRA authorized Medicare to bargain over the price of prescription drugs and contains a new $2,000 cap on annual drug costs for seniors on Medicare. U.S. Senate Republicans want to roll back the prescription drug measures if they regain the majority in next week’s election—although President Biden’s veto power may block that. Another Biden administration federal policy that could tame inflation is closer scrutiny of mergers that increase corporate power to gouge consumers and to suppress workers’ wages—mergers such as the one announced between two supermarket chains, Kroger and Albertsons. Absent surgical policies that address structural factors driving inflation—such as high prescription drug costs and corporations’ excessive market power—policymakers are left with the blunt instrument of engineering a recession. In today’s labor market, a recession would undercut the leverage workers currently have to achieve wage increases that compensate for inflation.