The (Real) Causes of the Current Inflation
November 2022
Andrew Winnick
Professor Emeritus of Economics and Statistics (Cal State L.A.)
President, The American Institute for Progressive Democracy
There are three distinct possible causes of the current inflation that we need to address, and then we also
need to discuss, as a Fourth Point, a Myth, regarding another often cited possible Cause for Inflation
1. Demand Pull – The argument: Too much money chasing too few goods causes price increases.
This argument is being used to attack government stimulus and relief efforts.
2. Supply Push – The argument: Increases in production or selling costs, including wages, necessarily
cause higher prices.
Current version: Breakdowns in the Supply Chain, especially from abroad, is causing
Inflation, as are the increases in energy and food costs due to Russia's
war in Ukraine. And recently there have been some increases in
nominal wages, but less that the increase in prices, so that real
(inflation adjusted) wages have not risen, but fallen.
3. Corporate Power Over their Markets (lack of competition).The argument: Control of their markets allows corporations to increase their prices
faster than increases in their cost, and is done in order to generate higher profits.
4. The Phillips Curve: A MythThe Supposed Tradeoff between Unemployment and Inflation
This is a disproved theory, no longer believed by most economists, but still fervently
believed by many politicians.
1. The Demand Pull ArgumentThis argument, as currently being expressed, holds that the government's programs to counter the
negative economic effects of the pandemic caused increases in demand that after a year or so caused
inflation. This is largely NOT TRUE. Government relief programs replaced only part of lost income via
money given to businesses to keep workers paid or via higher unemployment payments, and via some
increase in child allowances. Nevertheless, family income fell from 2019 to 2020 by 2.9%, and
continued to decrease through the middle of 2021. Only in the second quarter of 2021 did personal
income finally increase, due in part to temporary increases in government support programs, increases
that ended by the end of 2021. As of early 2022, personal income had still not yet returned to the 2019
level. Moreover, recent increases in wages and in family income have been well below the rate of
inflation and were certainly not enough to cause inflation.
2. The Supply Push ArgumentsThere has been a focus on three issues:
a. Supply chain interruptions and delays and their related costs: There is some truth here, but the
issue is why it happened and what did it impact.
"Just-in-time" inventory practices and the globalization of many inputs, both parts and raw
materials, and also the globalization of the production of many final goods, have indeed caused
some inflation.
Just-in-Time production: Instead of maintaining reasonable levels of inventories of
input materials, was irresponsible and left no production resilience. Plus corporate
efforts, with the support and cooperation of Clinton, Obama and both Bush
Administrations, caused production of both inputs and final goods to move abroad in
search of higher profits. But this caused lost jobs in the U.S., and only a modest
reduction in prices. But it did cause big increase in profits -- and even this could continue
only so long as the international supply chains worked without interruptions. But the
lack of having domestic inventories of inputs causes chaos, higher costs and lost
business when just-in-time input streams failed to work smoothly due to Trump
induced tariff battles, then were made worse by the covid pandemic, and finally were
disrupted by Russia's war in Ukraine and the various sanctions that followed.
Disruptions largely caused by the pandemic should have been addressed by government
much sooner, but were ignored by the Trump Administration and reacted too slowly to
by the Biden Administration. This has indeed caused some inflation in certain sectors,
but is not an explanation for the broader increase in prices that we are experiencing.
Example: Prices of cargo containers increased from $3000 to more than $20,000 and
then there was a lack of truck drivers w/ trucks to load them onto. Government should
have stepped in much sooner to increase the pass-through of incoming goods when
bottlenecks first became obvious in order to hold down the prices of shipping. Long
term we need a system of high speed, electric powered trains instead of trucks,
but…that's another topic.
b. Trump imposed tariffs and quotas that did interrupt some supply flows and caused some higher
prices. These policies, which have largely been left in place by President Biden, went on to worsen
supply chain problems when the Covid pandemic hit.
b. Russia's war on Ukraine: The interruption in the supplies of grains and other food products and of
oil and natural gas due to Russia's war against Ukraine has indeed impacted the markets for these
goods and led to an increase in their prices.
Net Effect: Supply push factors have caused price increases in some sectors, but are not the major
cause of overall inflation. Indeed, these factors do not even explain the extent of the increased prices
in the particular product areas most impacted by these supply factors.
3. The Corporate Power Over their Markets ArgumentIf companies merely raised their prices enough to cover their increases in costs, whether of the cost of
wages or of input goods, then their margin of profits as a percentage of costs would stay rather
constant. But that is simply NOT what is happening.
Inflation is the highest in 30 – 40 years ago, but corporate profit margins are higher than at any time in
the last 70 years ago. According to the U.S. Commerce Department, corporate profit margins are now
the highest since December, 1950. Simply put, prices are going up much faster than costs, resulting in
tremendous increases in profits. Indeed, the ability to raise prices is causing some employers to be
willing to deal with a tightening labor market, initially due in no small part to covid, by being willing to
raise wages since they know they can pass them on in even higher prices. One survey by the website
Digital.com reported that "more than half of U.S. companies reported raising prices beyond what was
required to offset rising input costs."
Insider, a web-based magazine, reported as early as Dec 2, 2021 that the:
"gains in U.S. corporate profits over the past year (37%) has vastly outstripped both
inflation (6.2%) and compensation increases (1.2%) leading Morgan Stanley to
recommend a return to a more equitable arrangement."
Insider goes on to state that:
"Even at their peak in the 1990s (which were well below the 1950s), corporate profit
margins were roughly half of what they are today…in part by paying workers a smaller
share (of the value) of what they produce. The Morgan Stanley researchers write that
the widening gap between company profits and worker compensation since the 1990's
is unprecedented and poses a threat to the health of the economy."
Indeed, corporate profits as a percentage of the Gross National Product (GDP) (that is, of the total
dollar value of all goods and services produced in the U.S.), even after taxes, increased dramatically
during the entire period of the pandemic and reached the highest levels in history in 2021, only to be
surpassed in 2022.
To give one example of this, consider the meat industry in the U.S. There are 100s of ranchers raising
cattle, but only a very limited number of what are called "feed lots" to whom the ranchers must sell
their cattle to be fattened on grains before being sold to the corporations who own the
slaughterhouses that process the cattle into the meat that goes to the super markets.
The key point is that there are only four major firms, two owned by non-U.S. corporations, that own all
of the major slaughterhouses that control this business. These firms set the prices that the feed lots
receive, which in turn determines the prices the feed lots can afford to pay the ranchers. The four
corporate slaughterhouse owners have seen their profit margins increase dramatically over the last
year or so, while (1) the prices consumers pay for beef have gone up dramatically, (2) the
slaughterhouse workers and their families have been dying of covid and (3) the ranchers are going
broke.
To his credit, Biden has shown an awareness of this pattern of corporations which control their
markets reaping increasing and record high profit margins and that this is "a" (really "the") major cause
of inflation. In fact, he even mentioned the meat slaughterhouse industry example in a recent State of
the Union speech. Moreover, he had instructed all relevant government agencies to begin to launch
investigations into the extent of corporate control of markets, with the goal being to begin to provide
the information necessary to design and enforce effective anti-trust polices. This would have been the
first such effort in the last four Administrations, two Democratic and two Republican. But there was
immediately a broad-based backlash by the corporate establishment and its thousands of lobbyists and
lawyers to deflect this effort. Their apparent goal was to block all of Biden's anti-trust efforts until
corporations fulfilled their hope for the Republican party to regain control of Congress in the
November 2022 midterm elections, which would become effective in January 2023. They then hope to
regain the Presidency in 2024, with the goal of putting an end to all anti-trust efforts. To date
(November 2022) no new anti-trust actions have come from the Biden Administration. And now the
Republicans have indeed taken control of the House of Representatives, which virtually guarantees
that no new anti-trust laws will come from the Congress that takes office in January 2023.
4. The Phillip's Curve – The Supposed Tradeoff between Unemployment and Inflation
As an aside, it should be noted that for decades economists argued that there was an inverse
relationship between the rate of inflation and the unemployment rate, such that as one increased the
other necessarily decreased. They also held that an unemployment rate of around 5.5 to 6% was a
critical point. Some even argued that it marked a sort of "natural" rate of unemployment and that if
government attempted to reduce the unemployment below about 6%, inflation would go up
significantly from an acceptable rate of about 2% until it become unacceptable. However, as early as
the 1960's many economists rejected that as a false theory.
It should be noted that the rate of unemployment for White workers was and is consistently well
below the national rate, while the rate for Black workers was and is about twice the rate for Whites,
while that for Hispanic workers was and is about 1.5 times the rate for Whites. So, accepting as
"natural," or as necessary to avoid inflation, a national average rate of unemployment of say 6%,
means accepting a rate for Whites of about 4.5%, for Blacks about 9% and for Hispanics about 6.7%.
Moreover, as every economist knows, the official, typically reported unemployment rate seriously, one
can say vastly, under-reports the real pain in the job market. It is one reason why a whole series of
alternative higher rates are calculated by the U.S. Dept. of Labor, but rarely reported in the press.
In the 1970's, we experience double-digit unemployment and double-digit inflation at the same time,
something the Phillips curve model said could not occur. Then, under Trump, we experienced the
official national unemployment rate dropping to 3.5% without incurring any substantial inflation at all.
Clearly the Phillips Curve was and is not useful as a predictive model. Nevertheless, many politicians
and some politically conservative economists still claim that efforts by the government to substantially
reduce unemployment will necessarily lead to accelerating rates of inflation. And on that false basis,
they argue against efforts to reduce unemployment and against efforts to reduce the impact of
unemployment on family incomes -- such as were implemented under both Trump and Biden in
response to the covid-19 pandemic. Now that significant inflation is occurring, these same folks are
quick to argue that it was the government stimulus programs that caused the inflation – something,
that as was argued above, is quite false. And these same folks are quite willing to entertain "the
necessity" (in their view) of causing a dramatic increase in unemployment, even a recession, in order to
reduce inflation back to the 2% level.
