As stubborn inflation remains well above the Fed’s 2 percent target, critics mainly on the left have voiced concerns that unprecedented price increases since the pandemic owe not to the Fed’s excessively loose monetary policy, the Trump and Biden Administrations’ trillions of dollars in stimulus, or even the prevalence of supply chain disruptions (which may in turn be the result of loose monetary and fiscal policy), but is instead driven by “greedy” corporations who are taking advantage of inflationary fears to greatly increase prices, and profits. For example, former Secretary of Labor Robert Reich starred in a viral Twitter video earlier in 2022 when he accused inflation of being “about corporate greed,” citing the fact that Tyson Foods reported a 48% increase in profit in Q2 2022 over the previous quarter. Such a metric is by all means a considerable increase, but who’s the real culprit behind inflation, public greed emanating from poor policy or private greed deriving from selfish capitalists? It’s not necessarily black or white, but the facts do largely endorse the former.
CPI, PPI, & MPI for new vehicles
Source: U.S. Bureau of Labor Statistics
Just this week, a study published by the Bureau of Labor Statistics found that profit-margin increases and price markups from car dealers “contributed modestly to overall consumer inflation,” including 0.3 to 0.7 percent of the overall 15.6 percent CPI increase from December 2019 to December 2022. Though such numbers largely fail to paint the picture of greed that activists like Reich attribute to inflation, as the Fed attempts to close in with its inflation target and while every interest rate increase runs the risk of worsening banking turmoil, it may nonetheless be a factor worthy of scrutiny. Reporting on the study for The Wall Street Journal, Ben Eisen writes, “Auto demand surged after customers got pandemic stimulus checks, while supply-chain snarls reduced supply. The sales prices for new cars skyrocketed. Much of that additional money went into the pockets of dealers, according to the research.”
Perhaps “greed” may indeed be an at least somewhat prevalent contributor to inflation, but I would argue that sweeping statements like those offered by Eisen and Reich might not tell the full story. Prices on new vehicles in the US are up almost 19 percent since the start of 2021, which Eisen recognizes has been greatly contributed to by an inability for supply-chain backlogged supply to catch up with fastly growing demand from stimulus payments. Inasmuch as inflation for cars was greater than the combined inflation rate for the components needed to assemble cars (capital goods, land, and labor), however, then that would necessarily result in an increase in profit margins as well for car dealers. Yet rising profit margins don’t necessarily suggest rising “greed” for car dealers rather than a large increase in demand and a lack of supply in the market for cars. After all, prices have been notoriously high for buying new and used cars since the pandemic.
A 19 percent increase in car prices overlooks an 11 percent increase in median nominal wages since 2021 as well as a 15 percent increase in overall CPI over the same time frame. Meanwhile, in light of Reich’s complaints with Tyson Foods, the producer price index for food manufacturing has climbed over 24 percent since the turn of 2021 as well. Although corporations may have certainly taken advantage of inflationary headlines and added a slight upcharge as shown by the BLS’s study, to point to rising profit margins as a sign of greedflation may be futile because it does not take into account changes in market forces for the actual product. When one digs through the surface a bit more as the BLS seemingly has, one may see a more complicated story that does not necessarily satisfy either side of the debate.