China Daily, October 19th. According to the British " Guardian ", a new round of inflation data released by the United States last week showed that prices continued to be at high levels, which has caused more questions about whether the Federal Reserve's interest rate hike ignores what many economists believe to be the real culprit of inflation : corporate pricing, energy costs and supply chain disruptions, and blindly raising interest rates will "not work."
Extra interest rate hike responded to supply chain bottlenecks, huge profits from US companies, and other problems ineffective
The news further aroused people's concerns. If Fed pushes the United States into an economic recession, unnecessary economic pain will occur. "Rate hikes don't work, and the Fed's overly aggressive actions are pushing the U.S. economy to the brink of a devastating recession," said Rakeen Mabud, chief economist at the Groundwork Collaborative think tank. "Supply chain bottlenecks, unstable global energy markets and rampant corporate profiteering cannot be solved by additional interest rate hikes."
The Fed and some economists insist that demand generated by overheating labor markets and rising wages is driving inflation, while higher unemployment and interest rates are the panacea. To this end, the Fed has raised interest rates five times in 2022 and said it will raise interest rates further, with Fed Chairman Powell acknowledging that these measures will "cause some pain" for families and businesses.
However, the US Consumer Price Index (CPI) data released on the 13th showed that this approach has little effect in pricing. Inflation rose to 8.2%, while August and September climbed 0.1% and 0.4% respectively. Claudia Sahm, a former Fed economist and founder of Sam Consulting, said the price drop was not realized because current inflation is largely not driven by demand or labor. "High inflation is not the workers' fault, but the Fed is launching a war against American workers," Sam said.
Federal Vice Chairman Lael Brainard even acknowledged the role of pricing and supply chain disruptions in his speech at the National Association for Business Economics this week. Brainard pointed out that since the outbreak of the new crown epidemic, the profit margins of the U.S. retail industry have increased by 20%, about twice the average hourly wage increase of employees in the industry. She added: "Retail profit margins return to more normal levels may be more meaningful to alleviating inflationary pressure on some consumer goods."
US companies enjoy huge profits, and workers and consumers do not benefit
A April analysis report from the Economic Policy Institute (EPI) provided data support for the theory that corporate pricing is a driving factor for inflation. Since the second quarter of 2020, the annualized growth rate of U.S. prices has exceeded 6%, while this growth rate was 1.8% in the business cycle before the pandemic. The EPI divides the prices of the non-financial enterprise sector into three main parts: labor costs, non-labor inputs, and profit margins.
The report's author Josh Bivens wrote that more than half of the growth now "can be attributed to richer profit margins" and labor costs account for less than 8%. The report found that this is almost completely opposite to what happened in the decades before the epidemic. "Companies increased their investment, increased their bonuses than before, and then passed on to consumers," Bevins said. "In April, the Guardian's analysis of 100 top companies filed with the U.S. Securities and Exchange Commission (SEC) found that between the corresponding quarters of 2019 and 2021 or 2022, net profits increased, while inflation swallowed up the wage gains of most workers. Bivens said the surge in demand for durable goods, coupled with supply chain issues, created "huge pricing power" for companies with inventory at hand.
Bivens said wages are falling, which should mean people are reducing purchases, weakening businesses’ pricing power, while some supply chain issues are being addressed on their own – some containers are down 64% from the same period last year.
Industrial Producer Price Index (PPI) tracking the cost of enterprises input shows that deflation occurred in July and August.It rose 0.4% in September, but the food and energy sectors remained flat. “This also supports the profit-making theory,” said Lindsay Owens, executive director of Groundwork Collaborative think tank. "We see that investment costs fall faster than consumer prices, and companies are not returning pricing to consumers, at least not yet."
Sam said that companies should "eventually" pass on lower input costs to consumers, because price cuts are "a good way to attract customers." In addition, she added that shareholders are constantly pressuring companies to raise prices, which may eventually be shooting themselves in the foot. But on the earnings call, at least some executives said they were not ready to cut prices and told shareholders that they planned to keep prices high as long as customers could digest them.
"Effective Measures" cannot obtain sufficient political support in the United States
Observers said that there is currently almost no politically feasible rapid solution in the United States, especially in restricting corporate pricing power. Sam said that solving many supply chain problems is difficult on geopolitical . On the other hand, the U.S. Department of Justice has launched a price monopoly investigation into the meat packaging industry, and new USDA regulations are also designed to promote competition in the industry.
But these measures are far less than those taken or seriously discussed in Europe. In Europe, EU and the UK have imposed huge profit tax on profits of oil, natural gas and clean energy companies. Meanwhile, hard price caps appear to be more popular as the EU faces a natural gas crisis enters winter. But these measures simply do not receive enough political support in the United States.
Owens said that the Federal Reserve is limited by monetary policy and cannot directly take any action on corporate pricing or supply chains, but Powell "may be more blunt" in public" that comprehensive measures are needed. She added that if the U.S. and other central banks act separately, the consequences are likely to be terrible and affect all over the world.
(Compiled by: Ma Rui, Editor: Han He)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-