A story in yesterday’s Wall Street Journal reminds us how even financial journalists may fail to go past common intuitions if not superstitions about inflation—or at least don’t ask all the questions that a familiarity with economic analysis suggests. “Some economists,” we are told, think that businesses are using inflation to “opportunistically” boost their profits, thereby fueling inflation in return (“Why Is Inflation So Sticky? It Could Be Corporate Profits,” May 2, 2023).
If inflation is caused by businesses raising their profits, why didn’t they do that before inflation? Because they did not expect their competitors to do the same, the story suggests. But if that is true, it means that businesses are not raising their profits now just because they suddenly want to (they were not greedy before!), but because it is increased market demand that is pushing up prices and short-term profits at the same time.
Aren’t consumers as greedy as businesses? So why aren’t they forcing businesses to cut or cap their prices? Same answer: because markets don’t allow it, that is, consumers are the ones bidding up prices, just as employees are responding to the bidding up of wages on labor markets.
But why are consumers suddenly bidding up prices? Why are businesses suddenly bidding up wages? Could it be that central banks (the Fed in the United States) have increased the money supply, in large part to finance the jump in government deficits? And why would a report in a financial newspaper not at least mention the existence of a respected monetary theory of inflation according to which the phenomenon is due to more money chasing the same quantity of goods?
In early 2021, after three years during which the Fed had increased the money supply (M2) by about 50%, chairman Jerome Powell declared:
Right now, I would say the growth of M2, which is quite substantial, does not really have important implications for the economic outlook.
Both economic history and theory strongly suggest it was not just a bad luck. (The Fed has since pushed down the money supply, partly repairing its error, at a cost.)
On corporate profits and inflation, The Economist shows more sophistication than the Wall Street Journal. The venerable British magazine writes (“Are Greedy Corporations Causing Inflation,” April 30, 2023):
People are looking for someone to blame—and corporations are often top of the list. According to a recent survey by Morning Consult, a pollster, some 35% of Americans believe that “companies’ attempts to maximise profits” have contributed “the most” to inflation, more than any other factor by far. … Arguments for “greedflation” rest on unsure theoretical ground. Companies did not suddenly become avaricious. … If you are fuming at paying $10 for a coffee, blame the barista serving it to you as much as the owner.
According to the monetary theory of inflation, however, baristas are not to blame either.
READER COMMENTS
Thomas L Hutcheson
May 3 2023 at 11:23am
“Even financial journalists?” They are the worst!
[No, not the worst. The worst are politicians blaming inflation on the failure to issue more permits for offshore drilling.]
Craig
May 3 2023 at 11:45am
For your consideration, Mr. Hutcheson: “95 percent of what you read in the financial press is either wrong or irrelevant.” — Steve Hanke 😉
Pierre Lemieux
May 3 2023 at 12:17pm
Thomas: I agree with your second paragraph.
Thomas Hutcheson
May 3 2023 at 11:48pm
Good that we disagree only about the optima 🙂
Craig
May 3 2023 at 11:43am
Governments will take responsibility for many things. Indeed, I expect the government to proclaim the IRA will be the cause of the current and pending short/medium term disinflation as well. But governments and their apologists will never take the blame for inflation. Today, the Democrats surely won’t do it and the Republicans naturally want to blame the Democrats for #bideninflation without sharing the blame Trump/Congress/Powell share for massive money creation in 2020. But make no mistake about it, the US government is responsible for the inflation, the Republicans and Democrats being jointly and severally liable for it.
Personally I don’t see the Economist showing any more sophistication today than the inflationistas of yesteryear.
“If you listen to people in Washington and talk, they will tell you that inflation is produced by greedy businessmen [Starbucks] or it’s produced by grasping unions [many baristas have voted to form a union] or it’s produced by spendthrift consumers, or maybe, it’s those terrible Arab Sheikhs [insert here Putin/Ukraine War and Saudi Arabia’s decision to cut output] who are producing it. Now, of course, businessmen are greedy. Who of us isn’t? Trade unions are grasping. Who of us isn’t? And there’s no doubt that the consumer is a spendthrift. At least every man knows that about his wife. But none of them produce inflation for the very simple reason that neither the businessman, nor the trade union, nor the housewife has a printing press in their basement on which they can turn out those green pieces of paper we call money.”
“Inflation is, always and everywhere a monetary phenomenon.” — Milton Friedman (both quotes of course)
What scares me of course is looking at Argentina. Another country that just doesn’t seem to learn the lesson. So looking at Friedman’s quote I must say I am rather impressed that today’s debate isn’t exactly the debate of yesteryear, but it does rhyme and ultimately while I do see short/medium term disinflation baked in the cake based on the Y/Y reduction in M2, M3 M4, ultimately the US regime is sleepwalking into a fiscal catastrophe and while I don’t think the regime will experience a hard default on its debt obligations, I am very confident the regime will resort to inflation. Governments will be governments and that’s seemingly what they do.
Thomas L Hutcheson
May 4 2023 at 7:55am
Governments ought NOT to take responsibility for inflation, or deflation, or recessions, or recovery from recessions. Those are all results of how the Fed sets it monetary instruments. Big changes in fiscal defects do require more nimbleness than no change, but it’s the Fed’s job to do what it takes hit its targets.
Craig
May 4 2023 at 11:01am
The Fed is government. Yes, I understand we could go into the weeds of it to discuss the nature of the organization and there’s even caselaw on it. The reason for that is that the governments wants a veil of independence. At the end of the day its a creature of statute, the Federal Reserve Act, and the Board of Governors is appointed by the President, JP being appointed by Trump and subsequently reappointed by Biden. Its website is even dot gov.
https://www.federalreserve.gov/faqs/about_14986.htm
Thomas Hutcheson
May 6 2023 at 5:41am
OK. I just wanted to make sure you didn’t think that “fiscal policy” caused in/disinflation, recessions, booms, can “create jobs” and vulgar Keynesian stuff like that.
Craig
May 7 2023 at 10:28pm
“OK. I just wanted to make sure you didn’t think that “fiscal policy” caused in/disinflation”
I see it as working in tandem since to the extent the Fed bought treasuries they were accommodating fiscal policy (at one point I think it was very much near 100% of issuance no less) and that unequivocally includes fiscal spending under Trump. Naturally they also bought MBS and to the extent they did that obviously government fiscal expenditures aren’t a necessary component.
Andrea Mays
May 3 2023 at 2:32pm
Thank you, Pierre, for writing this up. The WSJ should be embarrassed to publish such tripe.
MarkW
May 3 2023 at 3:33pm
WRT to inflation right now, we seem to have some combination of:
A) There’s a lot of ruin in a country, and
B) Hold my beer
David Seltzer
May 3 2023 at 4:03pm
Pierre:
John Greenwood and Steve H. Hanke, WSJ July 20, 2021, wrote, Too Much Money Portends High Inflation. The fed should pay attention to Milton Friedman’s wisdom.
To wit. “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”
I suspect some of the financial writers at the WSJ are less grounded in monetary theory.
Mark Brady
May 3 2023 at 7:10pm
“Too Much Money Portends High Inflation.”
So a level effect portends a rate of change effect? Are these guys for real? 🙂
Grand Rapids Mike
May 4 2023 at 9:58pm
Milton Freidman passed in 2006. I doubt that any journalist remembers much, if anything about him. Frankly when I hear that someone say they are a financial journalist and then hear their comments there is a significant disconnect. It is to our detriment that Milton Freidman is no longer around to counter today’s nonsense, especially about inflation. The Fed created today’s inflation with the massive growth of M2 of about 38% from March 2020 to December 2021. Today’s media does not care and understanding of this is not their game. The goal is to find or create a scapegoat, even at WSJ.
Jose Pablo
May 5 2023 at 3:19am
I guess journalists work somehow like ChatGPT: for “corporations” the next thing that pops up in their minds is “greedy”, for “profits” it is “unfair”
This reflex would be innocuous (just hilarious) if it wasn’t because it is prone to trigger political statements (Biden’s opinions on inflation are not that different from the WSJ journalist’s and Trump can beat any journalist at this game of “pairing words”) and, even worse, it can trigger new regulation
The main question: do politicians and journalists behave this way just because it is what readers and voters expect from them? … because, if it is the case, there will always be a lot of supply for this demand for economic nonsense
I am afraid that if a proper “Journalism Choice Theory” is developed, we will discover that this kind of writting is just unavoidable
Richard Fulmer
May 4 2023 at 9:59am
The “corporate greed caused inflation” idea is conspiracy theory writ large. Somehow, every company in America is coordinating their actions to raise prices at the same time. And none is seeing a chance to gain market share by “cheating” on the deal and lowering prices.
When I see nationwide movement in one direction, my first thought isn’t conspiracy, it’s government policy.
Jose Pablo
May 4 2023 at 8:33pm
I am extremely interested in understanding why the CPI (a measure of the average change overtime in the prices paid by urban consumers for a market basket of consumer goods and services) can change less (or more) than the average price charged to consumers by the companies providing the basket of goods and services used to define the index.
And yet this is what the article seems to suggest is happening.
As I see it, if the companies providing one product of the abovementioned basket increase their prices more than the CPI some other companies providing other product of the basket should increase their prices less than the CPI
Am I missing something?
It is also surprising in the article that increasing revenues while reducing cost seems to be some kind of terrible thing:
wasn’t that called “value creation” not such a long time ago?
Is not, precisely, what managers are paid to do?
Is losing money now the right thing to do? … Afterall if increasing your profits is, somehow, “bad”, then reducing your profits should be “good” and losing money should be “even better”.
I am confused … maybe Congress should enact a detailed guideline on what is the optimal P&L that “Society” expects from Corporations. This guideline, needless to say, should incorporate all the profound wisdom of the WSJ’s financial journalists helping to reduce inflation. This piece of legislation, no doubt, will make the US a better place to live, promoting the all important goals of equity, diversity and fairness: the guiding principles of the guidelines guiding the “new optimal P&L” for corporations.
What can go wrong?
Knut P. Heen
May 5 2023 at 4:25am
People get what they deserve. The majority wanted corona lock-downs. The lock-downs were financed by printing money. We are now paying for the lock-downs through inflation.
Craig
May 5 2023 at 9:31am
Whodda thunk, right? Oh, right my 12 year old was clever enough to figure out.
Jose Pablo
May 5 2023 at 5:46am
All over the article is this strange idea that the driver of prices are costs. But if this were true then such a thing as an unprofitable company would be impossible. But unprofitable companies do exist so …
The main driver of prices is your customers’ willingness to pay (which is relatively independent of your costs). And companies have smart well-paid people looking at ways to increase customers willingness to pay on a daily basis (increasing the “utility” of their products or segmenting their clients to capture part of the consumer surplus)
The question would be then: does inflation increase your customers’ willingness to pay?
And then you realize the journalist is getting the causality wrong: it is the increase in customer willigness to pay what drives inflation up.
An increase in the money supply drives up your clients’ willigness to pay. Companies capture this increase driving their prices up (as they are hardwired to do anytime they can). This increase in prices is then measured by a synthetic price index. The increase of this price index is what we call inflation.
Same thing happens when prices increase at 2% per year, by the way. But in these times, this very same mechanism does not capture journalist’s attention.
“Corporations’ price increases are causing this year 2% inflation” makes for a very lame headline
Walter Boggs
May 5 2023 at 12:01pm
I profit every time I buy a product or service, since I get something that is more valuable to me than the dollars I pay. Should I kick in a few extra dollars in order to be seen as less evil?
Mike Sproul
May 5 2023 at 4:39pm
When the Fed issues a new dollar, it gets $1 worth of new assets (mostly US bonds) as backing for that dollar. That does not cause inflation. What causes inflation is if the Fed’s money-issue outruns the Fed’s assets. This would happen, for example, when the government runs huge deficits, and the government’s bonds lose value. The result is that the Fed’s assets don’t keep up with the Fed’s money-issue.
Craig
May 5 2023 at 7:58pm
“When the Fed issues a new dollar, it gets $1 worth of new assets (mostly US bonds) as backing for that dollar. ”
Only if they subsequently sell that asset and pull the dollar back out. Quantitative tightening is absolutely doing that.
“if the Fed’s money-issue outruns the Fed’s assets” — I understand what you’re saying here and that is actually happening and in fact seems to be a problem for banks like SVB and FR who have bonds on their books purchased at lower rates which are now sitting on their books with unrealized losses because the rates have subsequently increased. But that’s not why you have inflation. Ultimately if the bonds lose value, the sale of the bonds wouldn’t sop up enough dollars to pull out the dollars created to purchase them, but the Fed has no intention of really coming close. The Fed chose an inflationary policy and subsequently since the end of QE and the start of QE has no chosen a disinflationary/deflationary policy.
Mike Sproul
May 6 2023 at 3:56pm
Compare two banks: One has enough assets to buy back all the money it has issued, while the other has insufficient assets. Neither bank currently chooses to buy back its money. Clearly, the bank that cannot buy back its money will see its money inflate, while the bank that can buy it back will not see its money inflate. There has to be a difference between the two cases. Either that, or the rules of finance and accounting will have to be rewritten.
Pierre Lemieux
May 7 2023 at 10:51am
Mike: I fear I don’t understand what you are saying. My problems: You are speaking about the current system where all banks create a common money, I assume? Even then, a (commercial) bank has sufficient assets to buy the money it has created, except for illiquid or bankrupt banks. (No bank is perfectly liquid, since a bank, by definition, transforms short-term liabilities into long-term assets.) Money created in response to increased public demand for money (the most liquid asset) is not inflationary. The only money issuance that generates inflation is that which is over and above the demand for money. (If you need more money and borrow on your morgtage from your bank, neither you nor your bank has generated inflation, although the whole fractional banking system may have if the money created is a common currency.) Or perhaps I don’t understand your claim. (I have reviewed some related problems in a previous EconLog post. They are not simple problems, of course.)
Mike Sproul
May 7 2023 at 1:35pm
“No bank is perfectly liquid, since a bank, by definition, transforms short-term liabilities into long-term assets.”
A counter-example: A bank holds 30-day assets, and issues money with a 30-day suspension clause. So even if a run happens, the bank can buy back its money after 30 days without breaking any promises. I know everyone says that banks “Transform…”, but I have never seen a convincing argument for it.
Banks only issue money to people who want that money badly enough to bring in $1 of bonds for every dollar issued. I suppose you could say that this willingness reflects “money demand”, but talk to any accountant or financial economist and they will tell you the important thing is having enough assets to back your liabilities.
Craig
May 7 2023 at 3:57pm
Imagine a brief thought experiment, let’s say I run the bank and I say, “If you bring me 1oz of silver, I will issue you a $1 silver certificate”
And this goes one and I maintain the 1:1 reserve. Now you find the next Comstock Lode and all of a sudden you bring me a bunch of silver and I give you more silver certificates. The money is backed, but there are still more silver certificates out there chasing the same amount of goods and services.
Now as the bank I could sell the silver to pull back the silver certificates and to the extent I do that, there will be fewer silver certificates out there chasing goods and services.
The silver is a loose analogy with the bonds of course. The difference being of course that silver is physical and needs to be physically mined whereas the bonds and the dollars created ex nihilo by the Fed aren’t limited in that way at all.
Mike Sproul
May 7 2023 at 6:33pm
Before the Comstock discovery, $1=1 oz, and 1 oz=10 loaves of bread. After Comstock, $1=1 oz, and 1 oz=6 loaves. Dollars are worth less, but only because silver is worth less.
Bonds and dollars aren’t created ex nihilo any more than share of GM stock are created ex nihilo. There’s always an asset backing every liability, and if those assets lose value, so will the liabilities.
Craig
May 7 2023 at 9:58pm
“Before the Comstock discovery, $1=1 oz, and 1 oz=10 loaves of bread. After Comstock, $1=1 oz, and 1 oz=6 loaves. Dollars are worth less, but only because silver is worth less.”
Well let’s change that a bit and replace the silver with bonds and now we have….
‘Before the Bond Issuance, $1 = $1 treasury at par, and $1 = 10 loaves of bread. After the bond issuance, $1 still = $1 par value of bonds, but now $1 = 6 loaves. Dollars are worth less, but would you say its because the bonds are worth less? That would be a bit awkward.
Indeed, silver has been used as a commodity money and yes, I realize I am changing the price from 1oz=10 loaves to $1 = 10 loaves because GIVEN in your example $1=1oz.
The measurement of the change in the general price level is expressed as a change in dollar price.
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