Since the beginning of this inflationary boom, there has been much discussion about the risks of a spiral. Although many of us avoided oversimplification, the inflationary experience of the 1970s polluted a debate about a reality that bears little resemblance to the reality of the time. Margins were not mentioned in the same way as wages and were therefore left out of the discussion. But if it now turns out that wages have not (so far) triggered a spiral, it is the companies and their services that have become the target of attacks. In this context, the term “greedinflation” or “avariinflation” is rescued by an article published in The New Yorker based on an earlier article by Isabella Weber and Evan Wasner.
According to these authors, inflation is mainly caused by “sellers” and has microeconomic roots. Thus, inflation is driven by firms with market power that are able to raise prices. Contrary to the prevailing macroeconomic view of inflation, these authors emphasize the role of individual firms in driving inflation.
In particular, these companies’ beliefs about how their competitors would react if they increased prices would drive the overall price increase. This coordination can be facilitated by industry-wide cost shocks and supply shortages. To support their argument, Weber and Wasner point to recent force majeure events in the industry, which have contributed to an environment conducive to price increases.
What mechanisms facilitate this coordination? Among other things, the authors refer to formal cartels, price guide rules and implicit agreements. In the event of industry-wide cost increases, such as rising input or raw material prices, companies may have a common interest in securing their margins. They understand that other companies in the industry are likely to have the same goal, so they raise prices in the confidence that other companies will follow suit.
Meanwhile, traditional economists argue that recent inflation is being caused by other forces, including some microeconomic forces, but particularly supply and demand. In this respect, the resulting debate is of great importance, as it suggests different ways in which policymakers should respond to inflation. If corporations are found guilty, price controls should be considered. If there is excessive demand, raising interest rates would be the solution to curb consumer spending. If the issue is a supply issue, action must be taken to expand supply or limit the impact on expectations.
Given the thesis of miserly inflation, others, such as Chris Conlon, propose other explanations, drawn from years of study on the subject. Together with his co-authors, and by analyzing data from more than 6,000 companies, Conlon concludes that there is no evidence of a link between rapidly rising prices in specific industries and increasing profit margins for companies. That is why, and many have emphasized this, with Weber and Wasner we are still dealing with a mere opinion article that does not even adequately explain the contagion mechanism of price increases or the reaction mechanisms.
And what is the evidence for Spain? You already know that lately I have devoted a large part of my columns to detailing what is happening in our country, including using data from AEAT. After several analyses, what is observed is always the same. First, there is no doubt about the contribution of margins to the current inflation. But, and this is always my point, this rise is concentrated in very few sectors, again belying the idea of a “general rise” that many wanted to see.
To mark the occasion, I calculate the margin per unit of product sold for all companies. Since the third quarter of 2021, when this episode of inflation started, the margin per average product has increased from 11.2% to 12.4%. Keep in mind that this is both the margins themselves and other components such as taxes or other expenses, such as financial ones. After this clarification, out of these 1.2 points, 3.1 are the contribution of a single sector, namely wholesale trade. The rest either contribute little or, as the numbers say, reduce the average margin.
And what about wholesale? Well, you already know, the commercial distribution of energy and fuel. You already know that the profits of the companies in these industries have increased significantly during the period under review, but have recently decreased significantly due to the measures taken or simply because the market has worked. The other sectors hardly contribute to this increase.
Thus, the thesis of the measly inflation does not seem to be more than a mere stringing together of alleged arguments in the media coverage for the time being. At least in Spain it is obvious that there seems to be none of that. On top of that, something else entirely could happen: the inflation excuse. With costs falling, it is possible that both companies and workers will seize the opportunity to ‘fill in’ the void they have left, thereby recovering some of the lost purchasing power from this impasse. So we’re not creating inflation, but rather preventing it from going down faster (ask the bar for an apology that we haven’t lowered the price of coffee yet). In short, what we’ve called price hysteresis all our lives.
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