It is, perhaps, the greatest emerging voice in the always fertile—and so often neglected—field of economic heterodoxy. Isabella Weber (Nuremberg, Germany, 1987) was one of the first to attribute a good part of the brutal inflationary escalation of recent years to business margins and today calls on central banks to lower rates immediately. Professor of Economics University of Massachusetts Amherst and associate researcher at Harvard Fairbank Centerattends EL PAÍS by video call.
Ask. How would you define the inflationary episode of recent years?
Answer. It has been a seller's inflation in a context of overlapping emergencies in the energy, freight, food and raw materials markets. These shocks have created a momentum that companies, with their pricing decisions, have then spread throughout the system. That is why I say that it is seller inflation: because it is what has generalized these shocks on the economy as a whole.
Q. That is, instead of partially absorbing these specific price increases, they have more than passed them on to consumers.
R. There has been some coordinated action: if companies in the same sector receive the same shock of costs, it is a sign that it is time for prices to rise. If they do not do so, they may be penalized by financial markets. Furthermore, if a company raises prices, it can be sure that its competitors will also do so, so it has no risk of losing market share. Just by protecting their margins, companies have managed to increase profits.
Q. Has the protection of business margins, and not energy, been the main fuel for inflation?
R. If the energy price shock had been absorbed by companies, we would not have had widespread inflation. What has created this generalized inflation has been the subsequent spread of the shock initial. It has become clear that companies are in a stronger position to protect themselves against an inflationary shock.
Q. In some sectors there have also been significant bottlenecks.
R. Yes, especially in the case of chips. And, when there is a bottleneck, there is a temporary ability to exercise a monopoly or quasi-monopoly. When these situations last over time, you can raise prices in such a way that, beyond protecting your margins, you increase them. We have seen it, also, in energy and raw materials.
Q. Are we facing the greatest example of an inflationary crisis accelerated by the protection of private sector margins?
R. In times of war, generally, if price controls are not applied, there is usually inflation and higher business profits. It is something almost by definition, derived from the very nature of these situations: it happened in World War I, in World War II…
Q. Cites price controls. On this occasion they have been limited to the energy sector, and not all countries have taken the step.
R. The governments could have been more ambitious: it took them months to realize that they had to act, until they saw that the rise in prices was going to end up destroying the economy and society. The majority moved too slowly, because in the collective mentality was the idea that any price stabilization policy was unjustified madness. I think that has to do with the neoliberal imaginary.
Q. To what extent has this crisis made evident the lack of competition in some sectors?
R. Extreme levels of concentration in critical sectors, such as the transport of goods by sea, in which eight companies control more than 80% of the world's fleet [de cargueros], or the trading of agricultural raw materials, in which very few names also dominate 70%. They have a superior level of information and a capacity to influence the entire value chain, and they are companies that have registered record profits in the last two years. In a situation of perfect competition, these price increases would also have occurred, but they have undoubtedly been increased by the power of these corporations. If they were subject to stricter regulation and greater transparency, the explosion would not have been so extreme.
Q. In recent years, in some areas it has become popular the term excuseflation, a play on words between excuse and inflation. Are those who use it right?
R. I think it brings up an important point in the relationship between companies and consumers: companies are concerned about whether or not price increases are seen as legitimate by consumers. In a context of mega shocks, with everyone watching supply chain problems on television, consumers are more forgiving of these price increases, which they tend to see as legitimate: if you go to the grocery store and see that prices have suddenly increased by 20% but before you have seen on the news that in recent weeks there is a grain shortage problem due to the war in Ukraine, you tend to think: “It makes sense.”
Q. We tend to accept it.
R. 2020 was the first year that many people saw shortage problems in supermarkets. In this situation we are also more inclined to accept price increases. So yes, I think there is some excuseflation while, in a context of shocks and emergencies, changes the mentality of consumers.
Q. Much more attention has been paid to the risk of price and wage spirals than to the role of margins and corporate profits on inflation. Is it an ideological question, too?
R. Yes. But it must also be made clear that, since 2021, there has been an extraordinary change in the debate. For decades it has been argued that there were no theoretical reasons to think that inflation could come from profits and from salaries.
Q. Have central banks gone too far in their response?
R. Yes. It's time to lower rates. In the United States, the impact of tightening monetary policy has been largely offset by ambitious fiscal policy. But not in Europe: with the debt brake, Germany has opted for fiscal conservatism, influenced by the same economists who in 2022 said that the shock energy prices was not that big of a deal and that the economy would be able to absorb it. The rate increases are being especially harmful for the global south, which has experienced a double shock: due to the increase in the cost of its exports and due to the increase in the price of money. And that is something that is hardly talked about. The growth of the US economy is very good, but, from a more global perspective, the consequences of these rate increases are being really harmful.
Q. The time has come, then, for both the Federal Reserve and the ECB to begin lowering rates.
R. Yes absolutely.
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