It’s not just corporate greed
Experts cite resurgent spending by consumers and governments as key factors behind inflation
WASHINGTON — Furious about surging prices at the gasoline station and the supermarket, many consumers feel they know just where to cast blame: On greedy companies that relentlessly jack up prices and pocket the profits.
Yet for all the public’s resentment, most economists say corporate price gouging is, at most, one of many causes of runaway inflation — and not the primary one.
“There are much more plausible candidates for what’s going on,” said Jose Azar an economist at Spain’s University of Navarra.
They include: Supply disruptions at factories, ports and freight yards. Worker shortages. President Joe Biden’s enormous pandemic aid program. COVID 19-caused shutdowns in China. Russia’s invasion of Ukraine. And, not least, a Federal Reserve that kept interest rates ultra-low longer than experts say it should have.
Most of all, though, economists say resurgent spending by consumers and governments drove inflation up.
The blame game is, if anything, intensifying after the U.S. government reported that inflation hit 8.6% in May from a year earlier, the biggest price spike since 1981.
To fight inflation, the Fed is now belatedly tightening credit aggressively.
On June 15, it raised its benchmark shortterm rate by three-quarters of a point — its largest hike since 1994 — and signaled that more large rate hikes are coming. The Fed hopes to achieve a notoriously difficult “soft landing” — slowing growth enough to curb inflation without causing the economy to slide into recession.
For years, inflation had remained at or below the Fed’s 2% annual target, even while unemployment sank to a half-century low.
But when the economy rebounded from the pandemic recession with startling speed and strength, the U.S. consumer price index rose steadily — from a 2.6% year-overyear increase in March 2021 to last month’s four-decade high.
For a while at least — before profit margins at S&P 500 companies dipped early this year — the inflation surge coincided with swelling corporate earnings.
It was easy for consumers to connect the dots: Companies, it seemed, were engaged in price-gouging. This wasn’t just inflation. It was greedflation.
“It’s very natural for consumers to see prices rising and get angry about it and then look for someone to blame,” said Christopher Conlon, an economist at New York University’s Stern School of Business who studies corporate competition. “You and I don’t get to set prices at the supermarket, the gas station or the car dealership. So people naturally blame corporations, since those are the ones they see raising prices.”
Just what combination of factors is most responsible for causing prices to soar “is still an open question,” economist Azar acknowledges.
So what has most driven the inflationary spike?
“Demand,” said Jason Furman, a top economic adviser in the Obama White House who is now at Harvard University. “Lots of government spending, lots of monetary support — all combined together to support extraordinarily high levels of demand. Supply couldn’t keep up, so prices rose.”
Researchers at the Federal Reserve Bank of San Francisco estimate that government aid to the economy during the pandemic, which put money in consumers’ pockets to help them endure the crisis and set off a spending spree, has raised inflation by about 3 percentage points since the first half of 2021.