Who’s to blame for inflation? It’s complicated
![<i>Anna Moneymaker/Getty Images</i><br/>Customers shop at a Giant Food supermarket in 2021 in Washington](https://abc17news.b-cdn.net/abc17news.com/2022/01/hypatia-h_4925840abf27ac30465b37201a148b09-h_a4f599d226eef2a535be220c299b7d6f-300-scaled.jpg)
Customers shop at a Giant Food supermarket in 2021 in Washington
By Allison Morrow, CNN Business
President Joe Biden and other politicians will tell you inflation is Corporate America’s fault. Corporate America blames the administration’s pandemic assistance programs for putting too much cash into the economy.
The reality, economists say, is that it’s all of those things. And more.
Whichever of the two main inflation gauges you read — the Consumer Price Index or the Fed-preferred Personal Consumption Expenditures price index -— the verdict is the same: inflation has soared to a nearly four-decade high.
Of course, inflation isn’t inherently a bad thing. In the United States, for the past 40 years or so, we’ve been living with an ideal low-and-slow level of inflation that comes with a well-oiled consumer-driven economy, where prices go up around 2% a year, if that. The current surge in prices reflects an economy roaring back to its fighting weight. What concerns economists and policymakers is when prices keep rising, and when wages don’t rise in kind.
Although wages broadly are also going up, they so far haven’t kept pace with the rising costs of food, energy, housing and everyday consumer goods. People are, understandably, frustrated. Although there’s no one single culprit to blame, here are some of the forces — Covid-19, greedy businesses, the supply chain crisis, the government — you can take your rage out on.
The pandemic
This is an easy one. The pandemic upended everything about our lives, and when the world shut down in the spring of 2020, it was like pulling the plug on the global economy.
But by that summer, demand for consumer goods started to rebound. Big time. Congress and President Biden passed an historic $1.9 trillion stimulus bill in March that put cash directly in Americans’ wallets. And rather than spending money on travel or dining out, we spent on stuff. Lots and lots of it.
Demand went from zero to 100, but supplies couldn’t bounce back so easily. Factories were on lockdown or navigating Covid-19 restrictions, and raw materials were harder to get because of the sudden swell in demand. Shortages of just about everything cropped up, especially workers to unload goods and drive them to their destination. We’re still untangling the mess at ports around the world.
Corporate America
It can feel morally satisfying and politically convenient to blame Corporate America. After all, profit margins are up across industries even as the costs of production have hit record highs.
About two-thirds of the largest publicly traded US companies reported fatter profit margins in the first nine months of 2021 compared with the same period in 2020, according to the Wall Street Journal. In other words, even as costs for raw materials, labor and transportation have increased in response to the pandemic, a lot big corporations are offsetting those costs by raising prices on consumers.
Analysts say it’s almost impossible to verify how much consumer price increases reflect rising production costs versus a desire to juice profits, but companies aren’t exactly hiding their price flexes. In fact, some are even on record bragging about their “pricing power” — corporate-speak for sticking customers with a bigger bill.
Democrats and consumer advocates are calling these companies out. Last month, Senator Elizabeth Warren blasted Hertz for spending $2 billion on a stock buyback — a common but controversial way to reward shareholders — rather than investing its excess cash in rebuilding its fleet, which could bring down record-high prices for consumers.
Although there’s some truth to the argument that corporations are making inflation worse, there is a bigger structural problem underpinning the issue: For decades, lax antitrust enforcement has put the concentration of economic power in the hands of a few giants.
“Viewed this way, the underlying problem isn’t inflation per se. It’s lack of competition,” wrote Robert Reich, a former US secretary of labor, in a recent op-ed for the Guardian. “Corporations are using the excuse of inflation to raise prices and make fatter profits.”
The Biden Administration
Republicans have been hammering Democrats and the Biden White House on inflation.
After November’s CPI came in at 6.8%, Senate Minority Leader Mitch McConnell wasted no time pointing fingers. “It is unthinkable that Senate Democrats would try to respond to this inflation report by ramming through another massive socialist spending package in a matter of days,” he tweeted.
It’s true that government spending boosts inflation, but economists have pushed back on the idea that Biden’s ambitious social safety net expansion would inflame price surges. “Worries that the plan will ignite undesirably high inflation and an overheating economy are overdone,” Mark Zandi, the chief economist at Moody’s Analytics, said in July.
Moody’s analysts noted that government spending on items such as rental housing for low-income Americans, reducing prescription drug costs and making childcare more affordable is aimed at cooling off prices and easing shortages.
Republicans blaming inflation on Biden are also conveniently forgetting the trillions of dollars in spending passed in 2020 that was supported by Republicans and signed by then-President Donald Trump, which economists say have also contributed to inflation.
The Fed
Money has essentially been free for the past two years, thanks to the Fed’s double-barrel shotgun approach to economic stimulus — interest rates near zero and a massive investment in bonds that keeps yields near rock-bottom.
That stimulus has staved off a lot of financial and economic pain, and was always meant to be temporary. But for months the Fed brushed off inflation concerns, vaguely dubbing price surges “transitory” before that word became almost comically devoid of meaning.
Now, the Fed is finally tapping the brakes. The central bank said last month it would wrap up its stimulus program faster than originally announced, and its updated economic projections show multiple interest rate increases in 2022.
The-CNN-Wire
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