Sellers’ inflation, profits and conflict: why can large firms hike prices in an emergency?

Abstract

The dominant view of inflation holds that it is macroeconomic in origin and must always be tackled with macroeconomic tightening. In contrast, we argue that the US COVID-19 inflation is predominantly a sellers’ inflation that derives from microeconomic origins, namely the ability of firms with market power to hike prices. Such firms are price makers, but they only engage in price hikes if they expect their competitors to do the same. This requires an implicit agreement which can be coordinated by sector-wide cost shocks and supply bottlenecks. We review the long-standing literature on price-setting in concentrated markets and survey earnings calls and compile firm-level data to derive a three-stage heuristic of the inflationary process: (1) Rising prices in systemically significant upstream sectors due to commodity market dynamics or bottlenecks create windfall profits and provide an impulse for further price hikes. (2) To protect profit margins from rising costs, downstream sectors propagate, or in cases of temporary monopolies due to bottlenecks, amplify price pressures. (3) Labor responds by trying to fend off real wage declines in the conflict stage. We argue that such sellers’ inflation generates a general price rise which may be transitory, but can also lead to self-sustaining inflationary spirals under certain conditions. Policy should aim to contain price hikes at the impulse stage to prevent inflation from the onset.

Contribution of Corporate Profits to Inflation in Türkiye after Covid-19

“…By 2023 the number of studies has increased even further (Glover et al, 2023;Hansen et al, 2023;Arce et al, 2023;Jung and Hayes, 2023;Weber and Wasner, 2023) and the issue made its appearance on the agenda of nearly all the international organizations (OECD, 2023;BIS, 2023;European Commission, 2023).…”

“…An alternative narrative for explaining the simultaneous jump in corporate profits and inflation was developed by Weber and Wasner (2023). The narrative rested on the question of is it possible that the supply bottlenecks in the pandemic have led firms in certain sectors of systemic importance to adopt a common understanding of price increases, with normally competitive companies behaving like monopolists?…”

Raising interest rates was the wrong medicine

“…It is therefore useful to examine the micro level explanations for price increases, such as profit margins and supply chain disruptions. Many have argued that the rising prices we have seen are due to firms with pricing power taking advantage of the pandemic to boost profit margins (see Nersisyan and Wray, 2022 for further discussion of examples of use of pricing power; see also Weber and Wasner, 2023).…”

“…Many have argued that the rising prices we have seen are due to firms with pricing power taking advantage of the pandemic to boost profit margins (see Nersisyan and Wray, 2022 for further discussion of examples of use of pricing power; see also Weber and Wasner, 2023). There is some evidence of this.…”

“…In addition, sectors with strong oligopoly pricing power were taking advantage of higher inflation to boost profit margins. While apologists within the economic profession deny this, leaders of the megacorps proudly report to shareholders that markups have never been higher (Weber and Wasner, 2023; Perkins, 2022).…”