Since the start of this inflationary conjuncture, there has been much discussion about the risks of a spiral. Although many of us have avoided oversimplification, the inflationary experience of the 1970s contaminated a debate about a reality that bears little resemblance to that of then. Margins were not mentioned in the same way as wages, thus being left out of the discussion. Now, however, when it is shown that wages have not triggered any spiral (so far), it is companies and their benefits that have become the target of attacks. It is in this context that the term “greedinflation” or avariinflation is rescued thanks to an article published in The New Yorkerbased on a previous one by Isabella Weber and Evan Wasner.
According to these authors, inflation is mainly generated by “vendors” and has microeconomic roots. Thus, inflation is driven by companies with market power that have the ability to increase prices. Contrary to the prevailing macroeconomic view of inflation, these authors emphasize the role of individual firms in driving price increases.
Specifically, the belief of these companies about what their competitors’ reaction will be if they raise prices is what would drive the general rise in prices. This coordination can be facilitated by industry-wide cost shocks and supply bottlenecks. To support their argument, Weber and Wasner refer to recent force majeure events in the industry that have contributed to an environment conducive to price increases.
What mechanisms facilitate this coordination? The authors point to, among others, formal cartels, price leadership rules, as well as implicit agreements. In the case of sector-wide cost increases, such as rising input or raw material prices, companies may perceive a shared interest in protecting their margins. They understand that other companies in the industry are likely pursuing the same goal, and so they raise prices, confident that other companies will follow suit.
Meanwhile, traditional economists argue that recent inflation is caused by other forces, some also microeconomic, but in particular supply and demand. In this way, the debate that has arisen is of great importance, since it suggests different ways in which those responsible for economic policy should respond to inflation. If corporations are found guilty, price controls should be considered. If it is excessive demand, raising interest rates would be the solution to curb consumer spending. If it is a supply problem, measures must be taken to expand the supply or limit the consequences on expectations.
Against the thesis of miserly inflation, others, such as chris conlon propose other explanations derived from years of study on this subject. Along with his co-authors, and by analyzing data from more than 6,000 companies, Conlon concludes that there is no evidence of a correlation between rapidly rising prices in certain industries and rising profit margins for corporations. Therefore, and as many have pointed out, with Weber and Wasner we would still be dealing with a mere opinion article, which does not even adequately explain the contagion mechanism of price rises or the reaction mechanisms.
And for Spain, what is the evidence? You already know that I have dedicated a good part of my columns recently to explaining in detail what has happened in our country using, among other things, data from the AEAT. After several analyses, what is observed is always the same. In the first place, that there is no doubt about the participation of the margins in the current inflation. But, and this is always my point, that said increase is concentrated in very few sectors, again refuting the idea of ”generalized increase” that many have wanted to see.
For this occasion, I calculate the margin per unit of product sold for all the companies. Since the third quarter of 2021, which is when this inflation episode began, the margin per average product goes from 11.2% to 12.4%. Remember that here are both margins themselves and other components such as taxes or other expenses such as financial ones. Having made this clarification, of those 1.2 points, 3.1 is the contribution of a single sector, wholesale trade. The rest either contribute little or, as the numbers say, reduce the average margin.
And what about in the wholesale trade? Well, you already know, commercial distribution of energy and fuels. You already know that the profits of companies in these sectors increased considerably during the period under review, although recently they have fallen significantly due to the measures adopted or simply because the market has worked. The rest of the sectors hardly contribute anything to this increase.
Thus, the thesis of miserly inflation seems to be no more than a mere thread of alleged arguments for the moment with media coverage. What is evident, at least in Spain, is that there seems to be none of this. Moreover, what could happen would be a very different matter: the inflation excuse. Given the fall in costs, it is possible that both companies and workers take the opportunity to “fill” the gap left by them and thus take advantage of this impasse and recover part of the lost purchasing power. It is not, therefore, that we generate inflation, but rather that we prevent it from falling faster (ask at the bar for the excuse for not having lowered the price of coffee yet). In short, what we have called price hysteresis all our lives.
Follow all the information of Five days in Facebook, Twitter and Linkedinor in our newsletter Five Day Agenda
#Greedy #inflation #excuse #inflation #debate #evolution #prices