OK, settled in with internet access and not riding 40 miles a day over hills and gravel. Column resumes tomorrow; but I want to weigh in today with a very long thread on inflation, especially the weirdly ugly debate over price-gouging 1/
First, where are we on inflation? As I read it, we probably have underlying inflation of 3.5-4 percent, with a higher headline rate reflecting probably temporary factors like supply chain disruptions and Ukraine fallout 2/
That’s too high, but we don’t have spiraling inflation due to unanchored expectations. Consumer surveys suggest medium-term inflation expectations have remained fairly stable 3/
So have near-term wage expectations, an indicator of underlying inflation running about a point below recent wage hikes 4/
And the bond market seems to expect elevated inflation for the next year or so but more or less normal inflation after that 5/
What story makes sense here? I’d say that we have a moderately overheated economy that the Fed should be and already is acting to cool off: interest rates relevant to real spending are way up. Plus stuff that is, yes, transitory 6/
Now, what about price-gouging? Elizabeth Warren and other Democrats have been arguing that some companies are taking advantage of an inflationary economy to increase markups, making inflation worse 7/
Many economists disagree, which is a defensible position. But the vitriolic nature of their attacks — talking about gouging is like prescribing ivermectin or injecting bleach — is weirdly over the top, and should provoke some self-reflection 8/
Consider three positions. 1. Gouging is the main cause of inflation 2. Gouging could be a contributory factor 3. Gouging cannot possibly be a cause of inflation, and anyone saying otherwise is ignorant and dangerous 9/
Position #1 is clearly wrong — but I don’t know any prominent figure who holds it. On the other hand, position #3 is also dubious economics. Gouging is probably a small factor, but it could be *a* factor. Why the vitriol? 10/
How can gouging cause inflation? Even if corps have monopoly power, weren’t they already exploiting it to the max, so that it caused high but not *rising* prices? Well, let’s get wonky and learn from labor economics 11/
Many economists who study the evolution of wages — for example the Great Compression of the 1940s, which lasted for decades — end up invoking the role of “norms”. But how can these matter in the face of supply and demand? 12/
One answer is that when a wage (or price) setter has market power, small deviations from the profit-maximizing price have only second-order effects on profits 13/ arindube.com
This in turn implies that seemingly small considerations — like fear of customer or political backlash — can inhibit firms from charging or paying what the traffic will bear. E.g., firms don’t cut wages in recessions bc they worry about morale 14/
And firms sometimes hesitate to raise prices, at least visibly — hence the phenomenon of shrinkflation, where you make stuff smaller rather than hike prices 15/ investopedia.com
But there will be less backlash if lots of other prices are also going up, so it’s not at all crazy to suggest that some corps are feeling freer than usual to exploit their market power, adding to inflation 16/
How big a factor is this? We have no idea. But the venom with which some economists and commentators are rejecting the very possibility is puzzling and disturbing 17/
It would be one thing if Dems were doing a Hugo Chavez, and demanding that the Fed roll the presses while we use price controls to suppress inflation. But they aren’t; heck, they aren’t even doing a Richard Nixon 18/
Even the Warren bill, while it would require large firms to offer explanations for price hikes, is far short of a true price control measure 19/ bloomberg.com
If you think that would be too intrusive, OK. But the anti-anti-price gouging rhetoric I’m hearing is bizarrely over the top. With everything else going on, why get so worked up about this issue? Something isn’t right here 20/
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