WASHINGTON — Furious over soaring prices at the gas station and supermarket, many consumers feel they know exactly where to lay the blame: on the greedy corporations that relentlessly raise prices and pocket the profits.
In response to that sentiment, the Democratic-led House of Representatives last month passed a party-line vote — most Democrats for, all Republicans against — a bill aimed at cracking down on alleged price hikes by energy producers.
Similarly, Britain last month announced plans to impose a temporary 25% tax on the profits of oil and gas companies and channel the profits to households in financial difficulty.
Yet despite all the public resentment, most economists argue that rising business prices are, at most, one of many causes of runaway inflation — not the main one.
“There are much more plausible candidates for what is happening,” said Jose Azar, an economist at Spain’s University of Navarre.
They include: Supply disruptions at factories, ports and freight stations. Labor shortages. President Joe Biden’s massive pandemic relief package. Closures caused by COVID 19 in China. Russia’s invasion of Ukraine. And, not least, a Federal Reserve that has kept interest rates ultra-low longer than the pundits should have.
More importantly, economists say the upsurge in consumer and government spending has pushed up inflation.
The blame game is escalating, instead, after the US government announced inflation hit 8.6% in May from a year earlier, the biggest price spike since 1981.
To fight inflation, the Fed is now aggressively tightening credit. On June 15, it raised its benchmark short-term rate by three-quarters of a point – its biggest rise since 1994 – and signaled that more significant rate hikes were to come. The Fed hopes to achieve a notoriously difficult result “soft landing” — a sufficient slowdown in growth to curb inflation without tipping the economy into recession.
For years, inflation has stayed at or below the Fed’s 2% annual target, even as unemployment has fallen to its lowest level in half a century. But when the economy rebounded from the pandemic recession with surprising speed and strength, the US consumer price index rose steadily – from a 2.6% year-over-year increase in March 2021 to the four-decade high of last month.
For a while at least – before profit margins for S&P 500 companies plummeted earlier this year – the surge in inflation coincided with rising corporate profits. It was easy for consumers to make the connection: the companies, it seemed, were indulging in price gouging. It wasn’t just inflation. It was greed.
Asked to name the culprits for soaring gas prices, 72% of 1,055 Americans polled in late April and early May by The Washington Post and George Mason University’s Schar School of Policy and Government blamed companies at profit, more than the share that highlighted Russia’s war on Ukraine (69%) or Biden (58%) or pandemic disruptions (58%). And the verdict was bipartisan: 86% of Democrats and 52% of Republicans accused the companies of inflating gas prices.
“It’s very natural for consumers to see prices go up and get angry and then look for someone to blame,” said Christopher Conlon, an economist at New York University’s Stern School of Business, who studies business competition. “You and I don’t have the right to fix the prices at the supermarket, at the gas station or at the car dealership. So people naturally blame the companies, since they are the ones seeing prices go up. »
Yet Conlon and many other economists are reluctant to indict — or favor punishment — Corporate America. When the University of Chicago’s Booth School of Business asked economists this month if they would support a law prohibiting large companies from selling their goods or services at an “unreasonably excessive price” during a market shock , 65% answered no. Only 5% supported the idea.
The question of which combination of factors is most responsible for the price spike “remains an open question”, acknowledges the economist Azar. COVID-19 and its consequences have made it difficult to assess the state of the economy. Economists today have no experience in analyzing the financial consequences of a pandemic.