We do not agree.
Instead, growth in recent quarters has reflected an increasingly tight labor market and rising labor costs, including wages and benefits.
Businesses set prices for their products so they can make a profit that exceeds their labor and material costs. Your margins and premiums usually rise and fall with demand. If sales are allowed, an increase in cost or profit targets will prompt companies to raise the prices of their products. When this happens consistently across the economy, not just in a single company or sector, it leads to inflation.
Some argue that as the US economy has expanded in recent decades, some large companies could more easily expand their profit margins, leading to corporate “greed”. There is, of course, ample evidence of both increased concentration and reduced competition. In addition, from the early 1960s to the end of 2019, the proportion of company revenues that went towards paying workers fell by about 10 percentage points to 57%, which allowed companies to generate more profits. Importantly, however, it moved away from workers’ long-term earnings and toward corporate profits, regardless of whether inflation was high or low. Furthermore, we see little evidence that greed inflation has fueled inflation in the recent past. In the decades leading up to the pandemic, both labor costs and profits were major contributors to inflation. But 2020 is surprisingly different. Over the past two and a half years, labor costs seem to be the real culprit, not profit. In fact, the share of work in corporate income since the pandemic has risen back to 60%, reversing a modest portion of the ongoing decline. Why are labor costs such a big part of the recent surge in inflation? There are two main reasons. First, the US job market is extremely tight. The combination of an unemployment rate of 3.5% and a job vacancy rate of 6.6% – roughly two vacancies for every job seeker – is unprecedented. As a result, wages and salaries are growing at an annual rate of 5.7%, more than 2% faster than before the pandemic. Second, despite the drop in output this year, firms continued to hire new workers quickly, causing productivity (the ratio of output per hour) to fall. As a result, labor costs per unit of production have increased by more than 9% year-on-year – another 40-year record. Since wages are the largest cost factor for firms, rising unit labor costs reduce profits and prompt firms to raise prices. In the 40 years before the pandemic, labor productivity (measured in terms of output per hour) increased by an average of 1.8% per year. That means the average wage increase of just 3.3% was easily in line with the Federal Reserve’s 2% inflation target. However, annual wage increases have recently been around three percentage points faster. Unless labor market tightening eases significantly, labor cost inflation is unlikely to moderate and could increase further.
The only way to bring inflation down to 2% is to slow down the economy and cool down the labor market. To do this, the Federal Reserve would have to further tighten its monetary policy while at the same time raising interest rates further.
Businesses have always been greedy as far as “greediness” goes, so inflation isn’t that high today. As a result, attacking companies trying to increase profits will not reduce inflation. This would require slower demand for their products and they in turn would need more workers.