52
votes
Does the "inflation due to wage growth" narrative hold water?
I've started to notice this narrative in my news feeds. The argument is high wage growth is contributing to stubborn inflation. So cooling wage growth is seen as positive. It'll help central banks pause the hike cycle sooner.
My knee jerk reaction is if wage growth is contributing to inflation it's minuscule; just enough to print the headline. I can't help but feel this narrative is a way to distract from the earlier price gouging narrative and to help employers scapegoat out of raises.
But I'll admit, I haven't looked into this topic deeply. So I'm happy to be schooled.
While I'm sure it has some effect, pointing to the wage growth of common folks as a problem when the ratio of CEO-to-worker pay has exploded is total bullshit.
According to Business Insider as of 2015 the real income growth of workers over the preceding ~40 years was 10% ... while the growth for CEOs was 940%.
There are a lot more workers than CEO's, though, so these percentages don't really tell us anything. A ratio of ratios like this is too indirect a way of measuring the impact.
It's also looking at the wrong thing. Inflation pressure comes from spending, not earnings. If a CEO is a workaholic who mostly accumulates stock or other investments and doesn't really spend on personal things then it has minimal effect on inflation.
Where they might have a huge effect though, is through their spending decisions on the job. So, look at business expenses rather than personal. How do they effect inflation? The combined spending of Tesla and SpaceX will likely far outweigh Musk's personal expenses. That's where you'd see his impact on inflation.
It's similar for politicians and civil servants. Their main impact on the economy comes from what they do on the job via the huge budgets they control. Personal expenses hardly matter. If you wanted to know Robert Moses's effect on inflation then you wouldn't look at his personal spending.
Rich people's personal spending does have effects on markets sometimes, but a more typical example might be wealthy Silicon Valley employees buying fairly ordinary (but nice) houses in the SF bay area. That's because there are a lot of them. One big house in the hills, or even multiple estates in different cities, doesn't do all that much in comparison. (That is, unless you have enough rich people to fill Atherton or Malibu. It's pretty reasonable to attribute price increases in wealthy communities to spending by rich people who live there.)
Someone could also look at what else very wealthy people buy to see whether their consumption has gone up. How's the yacht market doing? How about private jets?
(I didn't look up anything or prove anything, but that's the way I think about it.)
I appreciate the detailed response. I know that CEO pay doesn’t contribute nearly as much inflationary pressure as worker salaries, but I was just trying to make the larger point that citing inflation as a reason to “punch down” at common people is total bullshit.
Like we heard so much about how Biden’s student loan forgiveness would supercharge inflation…but not the PPP program or similar business subsidies that cost far, far more. (Yes I know the PPP program was crucial support for many businesses … but it was rife with graft and waste and unnecessary support that businesses used for spurious shit as well).
Things that help common people and reduce inequality should receive far less scrutiny over their inflationary pressure than welfare for the rich, instead of the other way around.
The PPP program did end up supercharging inflation. The problem is that we learned the wrong lessons from 2008 (or at least, applied them poorly). In 2008, giving out a bunch of money would've helped alleviate the recession, because the economy did not actually lose productive capacity. With COVID, though, we have had major supply chain issues and labor shortages, resulting in lower productivity. Subsidized demand and lower supply led to inflation, and the PPP was a huge part of that.
Hindsight is 20/20, though. If we have another similar global pandemic, we'll probably take a more balanced approach (or at least, we would, if we didn't have a dysfunctional government).
Yeah, PPP was badly done. The government had to send money out on an emergency basis and they tried to get banks to do it for them. Sending money to the people worked somewhat better but they weren’t set up to do that either. Universal basic income, even at a very low level like $100 a year, would result in creating payment infrastructure so they’re better prepared next time.
I’m not sure what you mean by “total bullshit,” but I think we should distinguish between effects on markets and whether we like them or not. Musk’s cost-cutting at Twitter is terrible but it does reduce spending (including by laid-off employees). Similarly for tech companies layoffs in general. It’s probably why housing prices in San Jose are down a bit. That doesn’t mean you have to like it! It means people’s actions have multiple effects. Recessions are bad but they do a lot to stop inflation.
It seems similar for student loans? Loan forgiveness has complicated effects. It’s a little like government spending - not bad if you like the results and positively good in a recession. When there are supply bottlenecks, more spending does result in competition between buyers, though.
If we assume loan forgiveness is good but inflationary, then we should do it anyway and the Fed can increase interest rates slightly to offset it.
An alternative to raising interest rates is that maybe the government should do something more targeted to reduce demand somewhere to reduce the inflationary effects. What kind of spending do you think is bad? That’s what should be taxed. Carbon taxes anyone?
But the problem with that is Republican resistance to taxes of any sort. So higher interest rates it is.
Right. When I say “total bullshit” I’m not disputing that loan forgiveness has an inflationary effect - it absolutely does. So does wage growth.
I’m saying that the prevailing media narrative, especially on the right, that wage growth and loan forgiveness are the major or even primary drivers of inflation and therefore must stop ASAP is total bullshit. Saying you’re concerned about a problem while willfully ignoring the lowest hanging fruit in terms of causes and solutions is total bullshit. It’s concern trolling, and it’s often used as justification for punching down at common folks by people who want to maintain the status quo.
Anyone serious about tackling inflation should support raising taxes on wealthy folks and rethinking corporate welfare, at the very least, before noodling on whether there are downsides to helping out everyday people.
So while I don’t dispute that wage growth can cause inflation I guess I find the focus on it (and loan forgiveness) analogous to trying to extinguishing a candle in a burning house. Sure, it’s fire. But let’s look at the big picture here. Anybody focused on that candle doesn’t actually care about the fire.
(Lest anyone think I’m looking for a handout … I’m fortunate to not have any student debt, and I quite possibly fall into the realm of wealthy people whose taxes should be raised! I’d rather pay more in taxes and see strife and inequality in my community improve rather than take home more money to invest in my fortress of solitude)
That's debatable.
It would only drive inflation if the recipients of the forgiveness went to a bank and gotten themselves a fresh new loan. Which I very much doubt they would do. Paying the loans would be deflationary in a fractional-reserve banking system. Government taking them on and paying them in the upcoming years would be neutral. But I am not privy to the details of the forgiveness program.
There was a ton of talk about the PPP leading to inflation, but everyone accepted the consequences. Now that we are in an inflationary period everyone is a bit more hesitant to enact more inflationary policies.
While true on the surface, inflation in reality does come from either voluntary on involuntary acceptance of price hikes. And since capitalists are always trying to increase their prices and decrease their costs (as opposed to e.g. consumer associations or housing collectives that operate on the basis of benefit to the stakeholders) and since we have predominantly capitalist economies, attempts to increase corporate profits play significant role in inflation.
At this point, it is so blatantly obvious even OECD and IMF agree: https://www.imf.org/en/Blogs/Articles/2023/06/26/europes-inflation-outlook-depends-on-how-corporate-profits-absorb-wage-gains
This effectively means that our purchasing power has significantly decreased. Well it does decrease year-over-year since 1970, but this has been a significant bump. And since wages always lag, I would go as far as to conclude that it's not in fact the wages that drive inflation. It's the profit motive. Most people only ask for a raise once they have trouble paying their bills. Because most people are not pathological hoarders of wealth.
Prices are the result of negotiations, and I mean "negotiations" very loosely. Anything you do to get a better price counts.
A lot of people don't negotiate wages very often, but they will definitely prefer higher job offers when they switch jobs. This is a way of getting a better (higher) price for your labor. Better for you, that is.
Inflation is just a lot of prices going up. That doesn't mean it's bad, necessarily. You should look for ways to charge more for your labor.
You say "capitalists" are trying to increase their prices, but for "capitalists" I read "everyone." Maybe not all the time, though. And certainly a buyer's association will try to lower its prices (or at least keep them the same), because they're on the other side of the trade. This is the same thing businesses are doing when they try to cut costs.
But their attempts to lower prices will be resisted by their suppliers and contractors. Consumer associations or housing collectives are still playing the capitalist game, they're just on a different side. Their contractors might not be happy with lower prices. Maybe they'll unionize?
A union that isn't trying to raise prices isn't doing a good job for its workers.
Not necessarily. These corporations actually have a choice and can be founded with different goals than simply extracting more value for a subset of stakeholders. A cooperative might take a vote on its policy and it would be completely for them to decide not to rip their suppliers off, to peg their employee wages to inflation and so on. Sure, they would still be limited by the rest of the market, but the members would be able to make moral choices.
Joint stock companies, LLCs and other forms are actually required by laws to maximize profits and a hypothetical CEO of a join-stock company who would e.g. decide to share profits with subcontractors would probably end up in jail, unless they provided evidence how is that going to directly improve the bottom line for the owners. Morals always take the back seat to profits with these types of corporations. They are all founded for the benefit of the capitalists.
Are you rising your prices on your kids when you walk (or drive) them to school? On your parents when you update their small business website? Your aunt when you teach her how to exercise so that her back does not hurt? On the kids in the community center where you teach couple times a week? I don't think so.
The real place where "average people" behave as actual capitalists is when they purchase stock¹. Directly or indirectly. Via pension fund for example.
The pension fund is actually super insidious:
Therefore:
The fun part is that those consumers, workers and savers are all the same people. So they end up exploiting themselves in the present so that they have some assets in place for the future. Killing all the bold innovative ideas and compassion on the way, damaging both their physical and metal health in the process.
Now you might argue that profits can be had by inventing something new that would help people save some of their time or otherwise improve quality of their lives. I believe that there has been time where this indeed worked. The easiest way to make money in those days have been to invent, improve and sell telephone, washing machine, vacuum, dishwasher, car, electric stove, microwave oven, TV, radio, computer and so on. But if you think about the current market trends where everyone is trying to subscribe you to a service, the way they are scrambling to DRM everything, the way they fight against the right to repair and so on, it seems obvious that those times are gone. The companies of today scramble to secure steady stream of profits with zero further investments. A pension, if you will.
¹) Well, they could also become land lords. But that's slowly getting harder and harder as well. Corporations have been vacuuming up real estate for some time now and I don't expect the share of real estate owned by physical people to start increasing anytime soon.
And thats why employee pension/ownership (tied to their specific company) are also pretty great.
They favor stability of the company over quarterly and ever-increasing profits. Economic stability is something that is highly undervalued these days.
The aggregate pension like 401k definitely pushes those negative traits because their share of ownership is hidden, and they ar abstracted from the realities of pump and dump.
Not to get off-topic, but I'd like to point out that employee share ownership/pensions are not great and they do not foster stability in the current environment for U.S. publicly traded companies. A private equity company purchased a stake in the publicly traded company I used to work at, took over board seats, diluted the shares, then loaded up the company with buyback debt. The market reacted accordingly, and my shares are now worth about 20% of what I paid for them. This has become a widespread practice (not to mention bankruptcies where pension holders are last-in-line creditors) that's only now receiving regulatory scrutiny.
Oh I meant actual ownership, ala a co-op...not token ownership.
Good insight to the further rot though.
It’s true that there are different negotiating styles and it’s not necessary to always argue strenuously in your own interest. Compromise involves taking the other side’s interests into consideration. There are lots of concessions you can make and good reasons to make them. Relationships don’t last if people can’t figure out how to negotiate for the long term, and that’s true of business relationships too.
We negotiate with family all the time. Negotiations with kids can be fraught, and sometimes it’s because they haven’t learned to take other people’s interests into account. Families sometimes argue about money. Being bad at negotiating can end a marriage or a business.
It can go the opposite way. Not understanding what you want, pretending that you don’t have interests you care about, and not sticking up for yourself can result in bad or ended relationships.
Businesses make choices about how hard to negotiate. As an example, companies vary considerably in their attitudes towards unions. A lot of workers at Google have unionized and, at least when I was there (years ago), I remember emails informing us about union organizing activity, saying in particular cases that they’re not anti-union and it’s up to the workers. Maybe that was a pose, but it seems decidedly different than Amazon’s blatant anti-union tactics? They are different kinds of businesses, though.
Businesses also vary in how they negotiate with customers. Having a customer-friendly reputation, being willing to bear extra costs to keep customers happy, is commonplace. There are limits, though; some retailers have had to revoke extremely customer-friendly policies because there was too much abuse.
I think you might have some misconceptions about how the legal structure of a company affects what they can do. Legal structure does matter, but it’s not true in practice that companies are “required by law to maximize profits” in a way that significantly restricts what management can do. There is a “business judgement” rule that lets companies spend money in all sorts of ways, as long as they can somehow justify it as good for the company in the long term. That includes things like paying workers more because vague good things will happen, like it’s good for the brand or improving productivity or something. (It does need to be a business expense; outright fraud is still illegal.) We often see companies spend heavily with flimsy justifications. There are many things that can result in shareholder lawsuits, but failure to maximize profits isn’t one of them.
It’s true that pension funds are different. They have responsibilities and there are limits on what kind of investments they can make. However, there are many styles of investing, many arguments you can make about what would result in higher returns. There’s a trend towards ESG (environment, social, and corporate governance) which allows pension funds to not invest in some companies or some industries because they think it would be bad for all sorts of reasons.
“Maximize profits” is a platitude that doesn’t provide a whole lot of guidance. For example, there’s usually a tradeoff between risk and reward. Choosing more conservative investments will result in lower returns, but that’s definitely allowed, so what are you maximizing? Pension funds also vary in how activist they are, but even for the more activist ones, it’s company management making the actual spending decisions, so their influence is limited. A pension fund’s investment decisions are a lot more abstract than a company’s spending decisions.
Also, the profitability of an investment decision usually isn’t provable. We are talking about predicting the future and predictions are often wrong. (Even for fixed-income investments like bonds, the default risk is a guess.) Investment decisions do need to be justifiable, but that’s a much lower standard.
Can you drill into what you mean by "pathological hoarders of wealth?" Where do you say the out-of-line compensation and growing capital are going, if not to economic productivity?
I think the end game for west will resemble Saudi Arabia. Pompous, nonsensical projects funded on the basis of being close to the inner circle.
https://en.m.wikipedia.org/wiki/The_Line,_Saudi_Arabia
The "economy" will mostly work. It's just that the buyers are all going to be a bunch of Musks and Bezoses and sellers everyone else. And we will all pay the taxes to the buyers so that they can in their enlightenment call the shots. And then their children.
Yeah, I tend to agree. Only counter argument I can think of is there is a few orders of magnitude more workers than executives. So, a small bump across workers might have surprising effects.
Yeah, while Fuzzy is not wrong that the ratio of CEO wage growth to worker wage growth is outrageous and morally suspect it has very little to do with the accusation that wage growth is feeding inflation. Your original question is something I'd like to know myself but The argument posted above sadly only distracts from it
CEO pay does not have much to do with inflation, though. CPI figures afaik look at costs of items, so the absolute way inflation increases is by increases in prices.
Management of companies affect inflation by their pricing decisions, but not their pay.
Why do you hate freedom and America?
/s
There's not a CEO in the world that manages every single employee. They "manage" the few people they've delegated to manage the people below them who have delegated others to manage below them on and on.
Does the CEO deserve to make $600,000 divided over the four GMs that manage eight stores each? Assuming the CEO hasn't brought on a VP that manages the GMs instead or does the CEO deserve $600k to manage one VP?
It's just about opportunity cost. If I'm the board of a company with $1b in market capitalization, and I'm looking to hire a CEO, let's say A and B are the candidates. I think B will do a 5% better job than A. I have to pay A just $500k, but I need to poach B from a competitor, so I'll have to pay $5m. What should I do?
Well, it's a $1b company. 5% of 1b is 50m. In the grand scheme of things, a lone line worker can do little damage and bring little benefit. It's important in aggregate that they do a good job, but not on an individual level.
On the other hand, just look at Elon and Twitter. Can you not see how a bad CEO can destroy value?
For the board, an extra 10m, 20m is OK for them to increase the chances of success even by a little.
I didn't say CEOs can't destroy a company, of course bad management can destroy value. The comment I responded to was justifying CEO pay vs managing workers, which they do not do. As if number of employees somehow justifies the hyperinflation of CEO pay. Not even getting into the gross overvaluation of companies these days.
The CEO does not perform any function that a team of 5 VPs couldn't do.
If they couldn't, they probably shouldn't be VP's.
Edit:
To me, this makes CEO/Owner pay that much more obscene. Its a marketting gimmick to sell the agenda that CEOs have some intrinsic decision-making ability the average Joe does not. And not just friends and family with deep pockets and connections to others with deeper pockets.
Amazon and Tesla would not be what they were if Bezo/Musk's parents weren't able to drop a few hundred K of seed money for their kid's startup. They probably wouldn't have gotten off the ground, and been outcompeted by someone else who did have a nice parent able to put in a good word with some other millionaires.
That's precisely how it worked at the corporate hellhole I worked in last.
CEO only spoke directly to the four VPs. Those four VPs only spoke to the Managers, those Managers spoke to the rest of us plebs.
Before Bezos stepped down as CEO did he know a single warehouse worker's name? Does Bezos know how to manage the 1.3M employees Amazon had when he stepped down?
Pretty convenient that inflation has led to record profits for businesses and when us workers hear that and say “hey, I want my cut”, it’s wage growth that is the problem. Nah. Don’t buy it.
Also, average wages have stagnated since Reagan and inflation has still been a constant. I won’t hear the argument made to me by people much wealthier than me that I need to accept less money to “do my part” in stopping inflation.
From an economic theory perspective this makes absolutely no sense. Inflation eats up corporate profits.
Companies that raise prices preemptively (which happens e.g. if their contracts are longer term) higher than inflation cause inflation to increase.
E.g. my company has tried to increase our billing rates due to inflation, as our contracts usually last for a year or more and we’ve in the past not had great success in increasing prices of existing contracts. Hence, we have a higher pressure to raise prices more for new customers and those where the contracts cycle. During the past year, though, we’ve not been successful at this and our inflation corrected earnings are definitely down.
Sure. I understand that because of inflation the “numbers go up” which can give the illusion that companies are making more money and that profit needs to be adjusted for the economic climate. That doesn’t change that wages should increase to keep up with inflation. The argument that everyday people should just accept that they make less compared to cost of living than they did two years ago? I don’t accept that, and I think people should not accept that.
I agree that it isn’t fun, but from a macroeconomic perspective if everyone’s wages were tied to MoM inflation, we’d have much larger inflation. The biggest cost to most companies is its employees and wage increases of the size of current YoY inflation would wipe the margins of the vast majority of companies. That’d lead to further price increases and layoffs.
As a worker you can always try to find another job that will pay more.
I don’t know that I believe employees should be thought of as a cost. I understand O&M and capital expenditures, but why can’t there be a protected budget for employees outside of O&M? Companies are continuously working to drive down O&M cost and that has led directly to wage stagnation since the 80s. Employees are the only reason businesses exist let alone function. I know that I can’t people can’t expect a 10% pay bump, but it’s not uncommon for pay increases to not be offered low wage employees at all.
Quit and find a new job isn’t that simple for everyone.
Given a company with 10% annual EBITDA, how would you structure a company so that there can be a protected budget for employees that would increase in tandem with inflation but without raising the companies prices?
Even with price increases, there’s no guarantee that the company wouldn’t lose sales, end up in the red, and be forced to lay off people.
The best way to help employees get a larger part of a companies margin is for employees to be part owners of the company, but that has its own issues (especially with how to organizes that and bring in new employees). But being an owner of a company does also expose you to more risk (I.e. your investment in the company disappearing).
All fair push back. I am not super literate in the business side of large corporations. I’m on the technical side of things. Mainly, I’d like to see change in terms of average worker pay vs cost of living. Either a period of time where cost of living can stagnate or a new trend in worker pay. The fact that our grandparents were able to pay their way through college with part time jobs vs the debt people have to go into now to still potentially never own a home can’t be the answer.
If I can ask a stupid question: Was inflation more manageable when workers had high purchasing power power in the past - say 1980s - than now where we have low purchasing power. This question comes from a stupid meme where someone showed that in 1980 with the minimum wage and the price of a big mac you could get ~6 big macs per hour, now however you can get ~.8 big macs per hour. I'm having a hard time conflating increased workers income - and associated purchasing power - with rising inflation. It seems that the two have been able to coexist in the past, so why is it an issue now? Is it the amount of purchasing power increase over a shorter time span?
It honestly isn’t that simple, a lot has changed since the 80s, e.g. back then one family usually had one provider whereas now usually both parents work.
One thing to keep in mind when making comparisons like that is that the way people eat has changed somewhat. If you go back far enough, eating out was once a luxury for rare occasions and cooking at home was the norm. You can fry your own burger or make your own sandwiches. I wonder how many kids bring their own bag lunches these days? Is it mostly "lunchables" now?
I don't think simple statistics will do it justice, compared to understanding how people used to live. (Which people?)
Conversely, with the rise of two-income households (often needed to keep pace with things that far outpaced inflation, like medical care, housing, and education), eating out is a drop in the bucket, and further drives other economic activity.
I'd wager it has more to do with perpetual lowering of taxes, particularly on highest-earners, that lends itself to wealthy people being able to outbid average people for things like housing (making landlords of upper-middle people, depriving housing to an average Joe).
Wealth inequality exacerbates inflationary woes, because the 'top' doesn't suffer while the bottom starves. $20/hr minimum wage should be easily feasible....if its not, then the problem is due to inflation being artificially low for too long, propped up by having too many people impoverished artificially skewing demand (because their low wages were primarily spent on essentials instead of luxuries).
Yes, the cost of food often isn't a big expense these days compared to other things, assuming you're sensible about it. But you could still spend a lot eating out if you regularly go to fancier places. In another thread there are people talking about ways to cut back on food expenses.
Inequality in wealth goes back to ancient times. It takes consistent, active effort to keep it in line in peacetime, and only a few countries do that.
Only about 2% of workers make the federal minimum wage nowadays, so it's not really representative of the broader population though.
Going by median income and the Big Mac index, the median household income could buy 16,600 Big Macs in 1984, while in 2021 the median household could buy 14,300 Big Macs. So there's been a bit of a decrease, but far from a 6x difference.
How many waitstaff are out there? They can be making $5/hr and that's above federal minimum wage for that job. The owners are supposed to make up the gap to minimum wage if tips don't match...but most don't.
The number of wait staff experiencing wage theft is low enough that there's no way that could be more than a rounding error for these numbers. Waiters and waitresses are just over 1% of workers according to BLS. Even if all of them were making only $5/hour it wouldn't move the median household income significantly, at least not for this calculation.
Here in Australia, the only people singing from the "wages cause inflation" songbook are the corporations and employer groups.
A report last year by an Aussie think-tank (PDF link) shows that profits are causing inflation. Look at the graph on Page 11 of that report, entitled "Figure 5: Decomposition of Australian GDP deflator by wages, profit and net taxes". The orange bars represent the portion of inflation that is caused by company profits, and the blue bars represent the portion of inflation that is caused by employee wages. Quoting from that report:
I've seen other articles and studies over the past few years which all repeat the same line: wages aren't the main driver of inflation, profits are.
So, the answer to your headline question is "No".
Oh you mean the two political parties of the USA. :)
Honestly, why isn't anybody talking about how the housing frenzy full of cheap debt dumped an order of magnitude more cash in the economy than the feds did during COVID? My old home skyrocketed in value $80k overnight, bought by some old guy cashing out his IRA. This let me take out an absolutely massive loan on a house in a way nicer neigborhood (in a cooler market) at < 3.0% interest, 30 years fixed, for about the same monthly payment from before. I ended up with roughly $20k extra in my pocket when it was all said and done, which went right into home renovations/moving expenses. All funded on cheap debt and old folks cashing out money that was previously locked up in retirement funds. This alone was more than double all my COVID relief put together.
You are right.
Even IMF acknowledges it:
Source: https://www.imf.org/en/Blogs/Articles/2023/06/26/europes-inflation-outlook-depends-on-how-corporate-profits-absorb-wage-gains
Well, there's multiple things here. For one, some people have an idea that inflation is like a lever, it's stuck in one direction or the other and you need to push it the other direction. But you should think of inflation more as a scale. If one side of the scale is below the other side, you can either put more items on the other side, or take items away from the heavier side. The sides are supply and demand, in this case.
Wage growth is on the supply side. The concern about wage growth isn't necessarily that it's the root cause of the imbalance, but that because of the way it works, it is a self-reinforcing loop, and policymakers want to get ahead of anything that can spiral out of control. Again, remember, it's a scale. What's concerning about that is that an unrelated factor, like supply chain issues from COVID, or a demand explosion from monetary injections during the pandemic, can knock the dominos of wage growth spiral down.
Secondly, price gouging is just vibes. No, really, price gouging is so ill defined it may as well not exist - it's essentially a normal market dynamic, price increases, but with bad vibes. No real guidelines theres, just case-by-case and vibes.
"Rising corporate profits", which isn't really the case at least this year, but regardless, is usually paired with the "price gouging" angle. If margins are increasing, that's indicative of demand-pull inflation. It's absolutely what you would expect from demand-pull inflation, which is arguably the more common form of inflation to begin with. Companies price their products at the point where the additional money they get per unit match with the gains they lose in units sold - the point of maximal profit. Which is not at the highest possible price. Now, loss-leading is a thing, and higher interest rates encourages less loss-leading, but the generic bread you buy at the grocery story was not loss leading.
If the generic bread cost $1 pre-pandemic, it wasn't because the generic food conglomerate was being nice to you. It was because that was the point where they made the most net profit. If it cost $2 now, it means that's now the point where their market research indicates they make the most profit. That could be because wheat or labor is more expensive, or it could also be that consumer demand for their product increased. It's not because they became greedier, as they are always at maximum greed, as they should be, as a player in a market economy.
Yeah, good points, esp. about price gouging being ill-defined. I was listening to an Odd Lots podcast (bloomberg) and they had a baker on to talk about increases in price of eggs and other inputs to his business. One notable point that came out of the discussion was he said in the current environment he could "get away" with price increases without effecting his demand as much. Basically, before inflation became a hot topic, if he hiked his prices his competitors who didn't hike would eat his lunch. But the dynamic changed once many businesses started hiking prices at same time. Not only were his competitors hiking at same time, but everything was going on, and consumers became "used to" price increases. It's an interesting observation. I think in a marketplace with many competitors, eventually price would "recover" to a healthier point. But in a marketplace dominated by a few players, there's room to exploit the public's sudden insensitivity to price hikes. And as you pointed out, saavy companies would exploit if they could.
The thing about that is that it's really not how consumers shop for staples like bread or eggs. For those, it's much more of a case of comparative shopping. You want to buy some basic bread, you go your local supermarket and you buy the loaf that cost the least. It doesn't really matter what consumers are expecting, if one company's bread cost $1.5 and everyone's cost $2 for people that just want bread, they'll buy the $1.50 one.
And it pretty much has in the US. Headline inflation has been low for a while now, hovering at 0.1% MoM. Core is still high, but it's mostly housing, and the housing market in the US is a whole different problem.
Consumer behavior is complicated. Even with staples, it's common here for grocery stores to have cheaper bread in one aisle and fancier freshly-baked bread near the bakery. There's the cheap cheese and the fancy cheese, the cheap meat and the fancy meat and the deli counter. That's pretty much true of every kind of food.
It wouldn't surprise me if the fancier stuff went up in price and a lot of people kept paying.
Also, to some extent, shoppers self-segregate by choosing different grocery stores. Whole Foods versus Walmart for example. (Richer people might still shop at Costco, though.)
For the people who do shop around, some look for the lowest prices, and others are foodies looking for some specialty item. They might both go to ethnic grocery stores, but for different reasons.
It seems like macroeconomic statistics are too zoomed-out to really see what's going on, and at the other extreme, anecdotes are hard to generalize from.
Actually my experience was that fancy stuff didn’t go up that much but cheap stuff did. In my area, the $8 per lb grass fed grpund beef is still $8-9 lb. The $20 per lb steaks are now maybe $25. The $8 per pound free range chicken is the same price. But the cheap $4 per lb ground beef is now $6-8 per pound, basic $2 per lb chicken is now $5, and basic foods like flour and eggs went up. I’m still paying the same for luxury foods like chocolate, high end coffee etc.
That’s what’s so harmful about this inflation, luxury goods are similar prices while basic goods doubled in price.
I feel like I'm learning. Thanks for the details.
Your bread example doesn't really touch on this, though.
Say when bread was $1, the bread company reported 30% margins. Then bread is $2, and the company reports 50% margins. Naively I say I'm spending $0.40 "too much". That's demand-pull, right?
So if the company is setting their price to solve that maximization problem, I guess there's some thing that pushes that maximum higher. If it were just "corporate greed" raising the margins, they'd still lose sales and net lower margins. That's counter to the greed, so that can't be the only factor.
I'm no economist and I don't really know what those factors could be, though. Can you expand on that?
Edit: saw your comment here, and that gives some more clarity. https://tildes.net/~finance/17mn/does_the_inflation_due_to_wage_growth_narrative_hold_water#comment-99q6
The thing is, you're not spending "too much", because there isn't an intrinsic price you "should" be spending.
That situation doesn't describe demand pull, because it misses the demand. There was some external stimulus that caused $2, which for a significant enough portion of consumers would be a high enough price they'd rather buy something else, to be acceptable. That is the "thing". From a theoretical point of view, consumers are more willing to spend more money on this product.
From a model point of view, the curve that represents how many units of bread a consumer is willing to buy at each price point shifts upward.
This can be from a number of reasons. Maybe the government just handed you $1000, so your individual purchasing power is higher. Maybe there was a deadly pandemic for which bread can cure (this is what caused hand sanitizer to spike in price - that was "price gouging" because vibe were bad), so everyone is trying to buy the bread.
Demand-pull is the reason why economies are expected to have 1-3% of inflation. If the economy is growing, people will, in aggregate, have more money, be more willing to buy things at higher prices, and companies will increase prices to match.
Great points in your many comments here. How much of what you are analyzing as demand-pull when there is a market shock is assuming the market stays efficient? When there is a deadly pandemic or a stimulus all of a sudden in the context of your examples you would expect a demand shock but your reasoning relies on the fact that the market dynamically stays at equilibrium as it transitions. If you have transience during this shock, you can expect some amount of "price gouging" in the form of price exploration which could have time scales much, much longer than, say, high-frequency trades. This also assumes the supply side also transitions efficiently but that might be a next order affect.
I mean whether or not it's price gouging, legally speaking, is based on the vibes. Bad vibes = price gouging. Price exploration can happen during shocks, and that's OK - it's part of the solution. If suddenly bread is price optimal at $5 when it use to be $1, wow, that's sure a big margin jump, and it indicates that people really want bread, way more bread than we can make right now.
Everyone with flour, water, and yeast is going to get into that - it's practically free money. That increases supply until we back to equilibrium. And at the end of it, we have waaay more bread as an economy. The price signal does its thing.
Hand sanitizer was an example of bad vibes. So it many cases it actually did get "price gouging" regulations placed on it, because early pandemic, so the vibes were bad. But price ceilings just lead to shortages - if it's basically random who gets to buy the stock of hand sanitizer, does it make sense, allocation wise, that I have the same chance as my local hospital? Ordinarily, the hospital has way more spending power and way higher demand, so they'll buy the expensive hand sanitizer and I'll do without.
Seeing as even the Wall Street Journal is acknowledging corporate profits as a contributing factor it's unlikely that rising wages is the issue since the scale of profits vs wage increases have been growing at vastly different rates.
I’m sure wages would become a contributing factor if companies were forced to match annual raises with YoY inflation.
Corporate profits are an indicator, not a cause. I'm starting to think that this narrative is a deliberate red herring for people to get hung up on. The article you linked mentions several reasons, such as implicit collusion, supply bottlenecks, low competition in certain sectors, high energy prices, and rising wages but somehow tries to turn our attentions back to blaming profits.
Also, isn't rising prices exactly what we'd expect from econ 101? If there is a reduction in supply and no reduction in demand, prices are predicted to go up regardless of the cost of inputs. People rag on the demand curve for being too simplistic as there can be many caveats, but it seems to model reality pretty well here.
Exactly. I get a metaphorical brain aneurysm everytime I see the "corporate profits cause inflation" angle. What you're really saying is that inflation is more caused by a demand imbalance than a deficit in aggregate supply, then.
The "corporate greed" angle doesn't even have logical consistency. Is it supposed to be the case that pre-pandemic, companies priced things below their market optimal point out of benevolence? Really? Tyson Food's doing the average american a solid? All of their peer companies doing the same? And now they're greedy and a jerk?
This is largely related to economic theories of off-shoring. By moving manufacturing overseas they were able to bring down prices on goods, people could be paid less and expect slower wage growth as long as they could still purchase things at a comparatively lower price. In a lot of ways it works, food is amazingly cheap, electronics are downright deflationary, furniture is no longer a multi-generational investment. The problem though is that this is only effective for things that can be off-shored. What can't be off-shored? Housing, medical care, education. The very things that people stress about these days because they are less and less affordable.
Globalization was a godsend for a lot of people and made goods cheaper across the board but at the end of the day, Westerners are paying a steep price when they can no longer afford the things that are impossible to off-shore. There are pros and cons to each but I am much more in favor or re-shoring industries and paying people living wages where things like healthcare, education, and housing become much more affordable. The problem is, we have to accept that our food, electronics, furniture, etc are going to become much more expensive. I love those things as much as the next person but I'd argue we could all live with learning to make do with a little less
We will all have to learn to live with less if we want to limit climate change. Barring some big innovation in carbon capture - all paths to net zero emissions involve a decrease in emissions, I.e. deceased consumption.
I feel like the ones touting this are big business. Over the last several decades, at least in the United States, real wages adjusted for inflation have remained relatively stagnant.
Would we not be better off looking at excessive corporate profits as the root cause of inflation? When corporations generate significant profits and they're not investing back into the economy through mechanisms like capital expenditure, employee compensation or reducing prices for consumers but rather they're retaining those profits or distributing them to their shareholders it can lead to inflation.
As businesses continue to raise prices to maximize profits despite already high profit margins, we're just going to see this continue to get worse and worse.
Just think about how many corporates during and since the pandemic have achieved record profits but have also continued to lay off well compensated employees only to turn around and rehire at lower wages? In the world of tech sales specifically, companies like Salesforce, Google, etc do this constantly.
No, in my opinion, it's not the increase to wages that's causing inflation - it's just pure and simple corporate greed.
That's exactly it. This is just yet another huge issue caused by greedy corporations but blamed through billions in
marketingmanipulation (like astroturfing) on the poor masses.Another example would be climate change, worst offenders are huge corporations (worst 20 companies caused more than 35% of all emissions since 1965), yet we always here to recycle and bike to work instead of taking a car but it's all just a drop in the bucket.
Here's a recent article by the International Monetary Fund about how half of the inflation is just caused by rising profits: https://archive.is/Hz8jk
Corporations aren't polluting for the sake of it. They're polluting to produce products we use. We all do need to change our lifestyles, so the products those corporations make aren't in such high demand.
However, given the nature of climate change (as a collective action problem), it is something that needs regulation. "Just recycle more and take the bus" isn't a solution if you do it, but it is what we need everyone to do.
I disagree, they're not polluting to produce products we use. They pollute to produce products they can sell, no matter what happens afterwards.
For example, look at food waste, none of that food was used. It was just produced, sold and thrown away. Another example would be fast fashion, how many clothes get bought just to never be worn, then land in a landfill. How much energy has been wasted on that, how much pollution created by it, just for the corporation to earn another quick dime...
Yes but...
They lobby to avoid punishment or responsibility for cleaning their pollution. They will also avoid adopting any measure to reduce pollution that is remotely more expensive than dumping toxic waste in a field.
Of course they do. They want to keep their costs down, and mitigating or reducing pollution increases their costs.
We do need to hold them accountable, but that will involve making their products more expensive to the consumers. We can't maintain our current lifestyles using these products, while at the same time meaningfully addressing climate change.
There's very good evidence that the inflation surge during and after the pandemic, and in relation to Russia's war in Ukraine, was due to specific supply bottlenecks and sellers' expectations that they could raise prices by a greater proportion on the basis of scarcity. The claim in that article is that inflation is currently being properly reduced by targeted price controls, not by making interest rates higher.
Anything that increases the relative cost or scarcity of energy supplies will feed into inflation for almost everything - there's plenty of evidence for that from the 1970s - '80s. We're less dependent on fossil fuels than we were at that time, but not independent at all. It's well-known in Europe that the inflation they're experiencing is mostly a direct and temporally obvious result of Russia's squeeze on natural gas supplies.
The U.S. has the luxury of a stabilizer - we're currently using oil from the Strategic Petroleum Reserve to prop up supply and minimize shock inflation. The various government interventions that Weber mentions have mostly been ignored or minimized by press coverage, but there is a significant counternarrative to the "people are getting paid too much" story.
A lot has been said already so I'll keep it short but it's actually quite simple: Even if the wage/inflation spiral was real it can only happen if wage increases are actually higher than the inflation itself. They aren't, so it won't.
Inflation is never due to one single factor, but a cumulative set of factors. If a large part of the workforce were to get a 20% raise tomorrow, it would increase their purchase power and subsequently the demand for many consumer goods. This puts an upwards pressure on prices and therefore inflation.
This would be a good thing in a slowing economy where everything is getting too expensive but wages aren't catching up and haven't been for years. The reason this idea is so prevalent is because on paper it sounds reasonable, wages go up, PP goes up, inflation goes up but it forgets to include decades of stagnating wages and ballooning wealth at the top.
We can have a 20% wage increase for the lower and middle class incomes and I doubt it will do much to the inflation. We're in so many crises, from energy, to housing, to migration, to drought, that at the moment everyone is feeling the squeeze rather than have any purchasing power at all. At least not nearly enough to impact inflation further.
I don't know much about economics, but I have serious doubts. Seems more like corporate greed to me.
My rent has gone up nearly $200 over the last 3 years, but my pay hasn't gone up to match.
People can get caught up on what is or is not causing inflation right now. At the end of the day:
US wages have been stagnant since the 1970s, but productivity (and the resulting wealth) has continued to increase. Then, from pandemic onward, we are seeing record profits in tandem with inflation.
Inflation is an increase in price and reduction in purchasing power. Why are corporate profits higher than ever? Because companies have increased price — you pay more dollars for the same or less product.
While there can be, and no doubt are, other contributing factors — like the inanity of perpetually low interest rates — this issue of wages being out of line with productivity is severely exacerbating the effects of inflation.
Something I came across recently on the topic of inflation:
https://jimmyakin.com/2022/03/the-mystery-of-inflation-pocketbook-pain-jimmy-akins-mysterious-world.html (podcast audio / YouTube)
That's not really how it works. Increases in monetary supply is one possible cause of inflation, which, by the way, is just the second derivative of price w.r.t time, as velocity is the second derivative of position w.r.t time. Specifically, that's increasing aggregate demand from the additional money sloshing around.
But inflation can also be caused by supply side issues - the OPEC embargo is the classic example. There's also many, practically an infinite, number of alternate ways that demand can increase in an economy beyond monetary supply.
I'm also confused at why this person is separating the federal reserve from the government... the central bank is part of the government.
No, I blame the banks too. Maybe I'd be less inclined to do so if they didn't perpetually lobby for looser regulations. Every dollar the Feds print the banks multiplies via debt.
If debt was kept on a shorter leash (ie banks must have more dollars in their vaults per dollar loaned), the feds would be able to control the money supply much more effectively.
In that vein, tax cuts also drastically cause inflation long term. The government's ability to tax means they can just collect and burn money to reduce money supply instead of just creating more. Its just that federal taxes have been perpetually lowered for the highest earners for my entire life. Bring back 95% taxes on the top income brackets.
Why? Inflation itself is not a problem in the slightest. It is a super valuable signal for the consumers. "Hey, there is less of this article, try to lower your consumption."
Wages not keeping up with it is the problem. If the amount of available goods decreases, prices should increase for everybody, but in reality they disproportionately increase for the worker class. Why? Because workers cannot effectively ask for a raise due to several decades of systematic war on collective bargaining. Meanwhile the capitalist class and their henchmen squeeze the workers just a little bit more so that their spending power is not affected.