Inflation

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K Graham
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Inflation

Post by K Graham »

I've discussed this at length in other threads, and I explained why inflation can be good for most Americans, but I wanted to start a thread on it to get your thought on something I didn't consider until I just came across this: INFLATION EXPLAINED: THE REAL REASON PRICES ARE GOING UP

The gist of it is that corporations are using this period of inflation as an excuse to gouge us on everything they're selling because they know that if anyone complains, they'll just blame politicians. This doesn't explain all the inflation of course, but it does explain why it has been more excessive that predicted. Corporate profits have been through the roof, never higher. And in the clip above, one CEO on FOX Business actually admitted that this is what CEOs typically do to increase share price/profits and ultimately their bonuses. I googled this subject out of curiosity and I'm surprised how many economists are talking about this. Robert Reich basically makes the same argument.

I also wanted to back up something I've been saying all year, which is that inflation was expected to happen post-Pandemic. This isn't something that started with Biden, and certainly has nothing to do with anything he's done. It is just the natural way of things when demand surges far outpace our means to supply goods and services, which is just a unique situation caused by things like pandemics. So here are some examples of economists talking about impending inflation as the economy booms:

"As the economy picks up speed through 2021, investors could have to wrestle with some unexpected inflation pressures, if only for a little while." - December, 2020

"After falling precipitously through the pandemic, inflation is now on the mend. With rebounding energy prices, the year-on-year change in the Consumer Price Index (CPI) is likely to move above 3% in the spring of this year." - January 2021

"Fed set to look beyond possible post-pandemic inflation shock" - January 2021

"Why all the worries about inflation? Aggregate demand has been artificially lowered because of the pandemic. Consumers cut back on spending. Business investment plunged in early 2020, and is still recovering. The unemployment rate is high, and millions of potential workers have left the labor force entirely. Those aren’t normally the conditions that would allow inflation to accelerate. But once enough Americans are vaccinated, consumer demand could easily snap back, and lower uncertainty might induce businesses to ramp up spending on capital projects. That potential spike in demand—perhaps enhanced by US government transfers to the unemployed, to low-income households, and to state and local governments—could overwhelm the capacity of the economy to produce goods and services. And that—demand greater than capacity—is the recipe for inflation." - March 2021

"How will inflation move in post-COVID recovery?" - April 2021
K Graham
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Re: Inflation

Post by K Graham »

I'm just going to go ahead and produce Reich's piece here:

If markets were competitive, companies would seek to keep their prices down in order to maintain customer loyalty and demand. When the prices of their supplies rose, they'd cut their profits before they raised prices to their customers, for fear that otherwise a competitor would grab those customers away.

But strange enough, this isn't happening. In fact, even in the face of supply constraints, corporations are raking in record profits. More than 80 percent of big (S&P 500) companies that have reported results this season have topped analysts' earnings forecasts, according to Refinitiv.

Obviously, supply constraints have not eroded these profits. Corporations are simply passing the added costs on to their customers. Many are raising their prices even further, and pocketing even more.

How can this be? For a simple and obvious reason: Most don't have to worry about competitors grabbing their customers away. They have so much market power they can relax and continue to rake in big money.

The underlying structural problem isn't that government is over-stimulating the economy. It's that big corporations are under competitive. Corporations are using the excuse of inflation to raise prices and make fatter profits. The result is a transfer of wealth from consumers to corporate executives and major investors.

This has nothing to do with inflation, folks. It has everything to do with the concentration of market power in a relatively few hands.

It's called "oligopoly," where two or three companies roughly coordinate their prices and output.

Judd Legum provides some good examples in his newsletter. He points to two firms that are giants in household staples: Procter & Gamble and Kimberly Clark. In April, Procter & Gamble announced it would start charging more for everything from diapers to toilet paper, citing "rising costs for raw materials, such as resin and pulp, and higher expenses to transport goods."

Baloney. P&G is raking in huge profits. In the quarter ending September 30, after some of its price increases went into effect, it reported a whopping 24.7% profit margin. Oh, and it spent $3 billion in the quarter buying its own stock.

How can this be? Because P&G faces very little competition. According to a report released this month from the Roosevelt Institute, "The lion's share of the market for diapers," for example, "is controlled by just two companies (P&G and Kimberly-Clark), limiting competition for cheaper options."

So it wasn't exactly a coincidence that Kimberly-Clark announced similar price increases at the same time as P&G. Both corporations are doing wonderfully well. But American consumers are paying more.

Or consider another major consumer product oligopoly: PepsiCo (the parent company of Frito-Lay, Gatorade, Quaker, Tropicana, and other brands), and Coca Cola. In April, PepsiCo announced it was increasing prices, blaming "higher costs for some ingredients, freight and labor."

Rubbish. The company recorded $3 billion in operating profits and increased its projections for the rest of the year, and expects to send $5.8 billion in dividends to shareholders in 2021.

If PepsiCo faced tough competition it could never have gotten away with this. But it doesn't. In fact, it appears to have colluded with its chief competitor, Coca-Cola – which, oddly, announced price increases at about the same time as PepsiCo, and has increased its profit margins to 28.9%.

And on it goes around the entire consumer sector of the American economy.

You can see a similar pattern in energy prices. Once it became clear that demand was growing, energy producers could have quickly ramped up production to create more supply. But they didn't.

Why not? Industry experts say oil and gas companies (and their CEOs and major investors) saw bigger money in letting prices run higher before producing more supply.

They can get away with this because big oil and gas producers don't face much competition. They're powerful oligopolies. Again, inflation isn't driving most of these price increases. Corporate power is driving them.

Since the 1980s, when the federal government all but abandoned antitrust enforcement, two-thirds of all American industries have become more concentrated. Monsanto now sets the prices for most of the nation's seed corn.

The government green-lighted Wall Street's consolidation into five giant banks, of which JPMorgan is the largest.

It okayed airline mergers, bringing the total number of American carriers down from twelve in 1980 to four today, which now control 80 percent of domestic seating capacity.

It let Boeing and McDonnell Douglas merge, leaving America with just one major producer of civilian aircraft, Boeing.

Three giant cable companies dominate broadband [Comcast, AT&T, Verizon].

A handful of drug companies control the pharmaceutical industry [Pfizer, Eli Lilly, Johnson & Johnson, Bristol-Myers Squibb, Merck].

So what's the appropriate response to the latest round of inflation? The Federal Reserve has signaled it won't raise interest rates for the time being, believing that the inflation is being driven by temporary supply bottlenecks.

Meanwhile, Biden Administration officials have been consulting with the oil industry in an effort to stem rising gas prices, trying to make it simpler to issue commercial driver's licenses (to help reduce the shortage of truck drivers), and seeking to unclog over-crowded container ports.

But none of this responds to the deeper structural issue – of which price inflation is symptom: the increasing consolidation of the economy in a relative handful of big corporations with enough power to raise prices and increase profits.

This structural problem is amenable to only one thing: the aggressive use of antitrust law.
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Re: Inflation

Post by Res Ipsa »

He's not wrong.
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Physics Guy
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Re: Inflation

Post by Physics Guy »

K Graham wrote:
Fri Jan 14, 2022 12:57 am
… the deeper structural issue – of which price inflation is symptom: the increasing consolidation of the economy in a relative handful of big corporations with enough power to raise prices and increase profits.

This structural problem is amenable to only one thing: the aggressive use of antitrust law.
I find the first conclusion here plausible enough, but to be convinced of the second one, I’d need a better understanding of exactly what this “power” is. It seems in principle as though any shmoe could just start making, say, diapers. Apparently that hasn’t actually happened, even though diapers are a gold mine. Why not?
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canpakes
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Re: Inflation

Post by canpakes »

Physics Guy wrote:
Fri Jan 14, 2022 7:45 pm
I find the first conclusion here plausible enough, but to be convinced of the second one, I’d need a better understanding of exactly what this “power” is. It seems in principle as though any shmoe could just start making, say, diapers. Apparently that hasn’t actually happened, even though diapers are a gold mine. Why not?

Maybe. If that schmoe is tooled up for it. But then there’s the sales, distribution and customer acceptance (familiarity) issues to contend with, if you’re new to manufacturing that product. And testing/compliance beforehand (are these disposable diapers? They’d better pass flammability tests per 16 CFR part 1611).

I remember some similar stories regarding companies that went full bore into mask production, near the start of the pandemic and after it became apparent that there weren’t enough masks to go around. They were able to produce large quantities, but ran into issues with distribution and sales. It ended up being a very frustrating situation for folks who were willing to help address the shortage, but they ended up holding significant inventories that couldn’t be moved.


ETA: OK, so the flammability test requirement for disposable diapers is subject to certain conditions, per https://www.ecfr.gov/current/title-16/c ... /part-1611 … so, maybe you can fire up that DiaperPress X3600 in the garage and slap out a few gross, after all. Good luck. : )
Chap
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Re: Inflation

Post by Chap »

Physics Guy wrote:
Fri Jan 14, 2022 7:45 pm
It seems in principle as though any shmoe could just start making, say, diapers. Apparently that hasn’t actually happened, even though diapers are a gold mine. Why not?
Because in order to compete effectively with the present producers of diapers you need to establish a very large-scale production and distribution network.

And given the way people buy diapers, you need to establish an image has a trusted brand, as good enough to put on your kids.

And you need to convince the big supermarket outlets that if they order from you their customers will buy your product, and that you can supply them reliably.

You can't just start making diapers in your garage.

Your question is a bit like saying "If you don't like Donald Trump, any red-blooded American can stand against him in the next election." A theoretical, but not a practical proposition.

ETA: Great minds think alike, eh Canpakes?
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canpakes
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Re: Inflation

Post by canpakes »

I just want to state that Chap and I are not in the same room, lol.
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ajax18
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Re: Inflation

Post by ajax18 »

They’d better pass flammability tests per 16 CFR part 1611).
Nothing like government regulations to stamp out small businesses and keep the market under the control of the corporate giants.
And when the Confederates saw Jackson standing fearless like a stonewall, the army of Northern Virginia took courage and drove the federal army off their land.
K Graham
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Re: Inflation

Post by K Graham »

ajax18 wrote:
Fri Jan 14, 2022 11:54 pm
They’d better pass flammability tests per 16 CFR part 1611).
Nothing like government regulations to stamp out small businesses and keep the market under the control of the corporate giants.
Yeah, the usual whine about regulations. Par for the course. How much economic history do you need to know this Right Wing talking point is bogus? Both of the Bush Presidents focused on deregulation and it gave us the worst financial crisis since the Great Depression. Hell, even Bill Clinton played a roll in deregulating the banks.
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Re: Inflation

Post by Gadianton »

I'm sure there's instances of collusion that aren't helping anything, but there's no way that fundamentally this is all driven by corporate greed. For inflation to happen, there has to be more money somehow. Everyone getting greedy and raising prices would be unsustainable without more money chasing it.

Low interest rates since 2018 have done the heavy lifting.
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