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Why is inflation so sticky? It could be corporate profits

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Re: Why is inflation so sticky? It could be corporate profits

#31

Post by refurb »

rhaway84773 wrote: post #22
qeternity wrote: post #18

In the past 15 years we engaged in unprecedented fiscal and monetary stimulus, which saw US Govt debt triple to $30T and the Fed balance sheet increasing 8 fold to $9T. But yeah, I'm sure it's corporate profits.

And yet despite 15 years of stimulus we have had persistently low inflation for all except the last 2 years or so, the first half of which was very clearly driven by supply chain issues. It’s almost like even if stimulus has had an impact it’s not the only, or even the primary driver.

But supply chain issues have resolved yet inflation is still high?

If you want to understand why the massive expansion of the monetary supply didn't initially stoke inflation, Professor Selgin does a nice job of explaining it.

https://www.cato.org/blog/rudderless-fed

Basically, the Fed printed new money, but at the same time offered a very high interest rate on Excess Reserves held at the Fed (first time ever in 2008). So banks took the new money, and deposited it back at the Fed because they got a higher interest rate than anywhere else. So at least for the for a while, a lot of the new money never entered the broader economy. Check the Fed's charts on excess reserves. $3.2T dollars was just sitting at the Fed collecting interest.

https://fred.stlouisfed.org/series/EXCSRESNS

This was entirely intentional by the Fed. Bernake said "our liquidity provision had begun to run ahead of our ability to absorb excess reserves held by the banking system, leading the effective funds rate, on many days, to fall below the target set by the Federal Open Market Committee. … Paying interest on reserves should allow us to better control the federal funds rate, as banks are unlikely to lend overnight balances at a rate lower than they can receive from the Fed"

The Fed was initially try to "sterilize" the new money by selling Treasuries at the same time (print $1T in money to buy failed assets, sell $1T in Treasuries = net $0 new money). But they ran out of Treasuries, so resorted to printing new money, but incentivizing banks not to use it because otherwise the they'd drive the interest rate way below target.

Re: Why is inflation so sticky? It could be corporate profits

#32

Post by _hypx »

silisili wrote: post #3

It's a likely theory. But economics teaches us when a player overcharges, others will step in to undercut and take all the market share. So, we're at a point where we need to admit that mantra isn't true in the modern age, or admit that we've done a terrible job at preventing effective monopolies/duopolies from forming.

Some companies are playing with fire by charging so much. A notable example is Nvidia, which is basically crippling its own lineup with their weak specs and high prices.

Re: Why is inflation so sticky? It could be corporate profits

#33

Post by xyzzyz »

tiedieconderoga wrote: post #13
silisili wrote: post #9

Earlier quoted context omitted.

Perhaps you went to a better school than I did. I only did 101 and 102, but even then the professor always spoke in terms like we were some old village, probably to make things easier to understand. But obviously those analogies don't apply to the world today, mostly.

The problem is that people aren't rational, and they don't have perfect information. So the history of finance and commerce has been a cat-and-mouse game where the cats find new ways to cheat people, and the mice try to recognize and prevent those schemes. One example: cartels. If an industry is dominated by a small number of large players, they can collude to set prices and stifle competition through regulatory capt…

In practice, the markets still work pretty great even without perfect rationality and information. Those are just assumptions for a mathematical model, not something that must always be satisfied lest everything collapse. Econ classes will show you how things can break if these assumptions are not satisfied, but in actual practice, they don’t need to be satisfied perfectly in order for actual operations to match mathematical models very closely.

Re: Why is inflation so sticky? It could be corporate profits

#34

Post by refurb »

silisili wrote: post #3

It's a likely theory. But economics teaches us when a player overcharges, others will step in to undercut and take all the market share. So, we're at a point where we need to admit that mantra isn't true in the modern age, or admit that we've done a terrible job at preventing effective monopolies/duopolies from forming.

Economics is theoretical. Nobody believes it perfectly describes the real world. No model is correct, but all models are useful.

As well, nobody said economics happens on an instantaneous timescale. Those trends can still happen, but take weeks, months or even years to play out.

Re: Why is inflation so sticky? It could be corporate profits

#35

Post by Rury »

autoexec wrote: post #30
throwaway5Am1k wrote: post #26

Earlier quoted context omitted.

>"government spending" does not cause companies who are making record profits to increase their prices. That's just greed. It absolutely does. If people have "extra" money (e.g. COVID payments), they can bid higher on limited resources (i.e. inflation). If there's more employed (i.e. government jobs), that's again, more people with more money, for limited resources (i.e. inflation). While I'm sure companies are takin…

The problem is that people don't have "extra" money, they have record amounts of debit and rising homelessness. The depressingly small amount of money people got in aid from the government kept their lights on, kept food on the table, and helped them transition to working/schooling at home at a time when they couldn't go to work and had no income at all. What little "extra" money made it into the hands of regular Ame…

You're right in that (some) people don't have "extra" money. Most people can't print themselves money.

However, some people do have "extra" money, particularly people who have access to the money printer, or who are bailed out by the people with the money printer. Guess who buys most of the government debt, allowing the government to overspend? The Fed.

Government spending isn't in a vacuum either. Every dollar the government spends goes into someone else's pocket, who they go on to further spend it. And the government doesn't spend it's money equally, meaning not everyone gets that "free money" equally, which means, some people are getting the short end of the stick, as others are getting richer because of it.

If you want to know how the rich get richer, while the poor get poorer, this is how.

Re: Why is inflation so sticky? It could be corporate profits

#36

Post by refurb »

wg0 wrote: post #23

Basic issue isn't excess of money. Basic issue is shortage in supply. Demand hasn't skyrocketed magically. The world over production levels were lowered to almost zero for couple of years. Interest rate hikes have wreaked a havoc of their own.

Why would a supply chain issue in a handful of products cause the price of all items to go up?

That makes no sense.

Re: Why is inflation so sticky? It could be corporate profits

#37

Post by shagie »

throwaway5Am1k wrote: post #26
autoexec wrote: post #21

Earlier quoted context omitted.

"government spending" does not cause companies who are making record profits to increase their prices. That's just greed. All the free money being printed hasn't stopped Americans from seeing utility disconnections, credit card balances, and bill delinquencies skyrocket. Evictions have also been rising in suburbia, but somehow we're supposed to think that all the price hikes on everything is because the American peop…

>"government spending" does not cause companies who are making record profits to increase their prices. That's just greed. It absolutely does. If people have "extra" money (e.g. COVID payments), they can bid higher on limited resources (i.e. inflation). If there's more employed (i.e. government jobs), that's again, more people with more money, for limited resources (i.e. inflation). While I'm sure companies are takin…

So, between three years and two years ago I got a pre tax total of $2200 (some states had them as taxable income).

How is that amount still causing inflation?

You say "While I'm sure companies are taking advantage of the fact" - that's a present continuous tense... I used the past tense for when I last got a stimulus check.

So why present continuous? Why not say "while I'm sure companies took advantage of the fact?"

Lets try another take on it...

https://www.nytimes.com/2023/04/21/business/procter-gamble-3...

> Another round of price increases on household products like Gillette razors, Dawn dish soap and Swiffer dusters bolstered Procter & Gamble’s bottom line last quarter, the company said on Friday, a sign that stubborn inflation may linger as companies defend their profit margins.

> Procter & Gamble, a consumer goods bellwether, said its profit grew in the first three months of the year after it raised prices 10 percent across its brands. That rise was the company’s second consecutive quarter of double-digit increases. Its profit margin expanded in the quarter, with price increases more than offsetting the rise in what it paid for raw materials.

> Revenue rose 4 percent last quarter from a year earlier, even as sales volumes — the number of rolls of Charmin toilet paper and boxes of Tide detergent — fell 3 percent as consumers traded down to less expensive alternatives or bought less. In other words, Procter & Gamble made more money even though it sold fewer products. Sales volumes at the company have declined in the past four quarters.

So, can you explain why my $2000 two years ago is still contributing to the increase of dish soap today, and why the prices are going up, and why the company is making even more?

Re: Why is inflation so sticky? It could be corporate profits

#38

Post by simiansays »

silisili wrote: post #3

It's a likely theory. But economics teaches us when a player overcharges, others will step in to undercut and take all the market share. So, we're at a point where we need to admit that mantra isn't true in the modern age, or admit that we've done a terrible job at preventing effective monopolies/duopolies from forming.

Why not both? The modern dismantling of antitrust regulation and enforcement is a significant driver of both. It's gotten way worse now than ever, to the point where private equity firms like Vanguard and Blackrock can be the biggest shareholders in direct duopoly competitors (KO and PEP are an example), or where investors and producers are permitted to fully horizontally and vertically integrate (AMZN is an example). And media (among many other industries) has been permitted to consolidate to ridiculous levels that would have been unimaginable to the architects of early-mid 20th century antitrust laws even on a practical level -- an Amazon-level entity would have been literally impossible to envision in the early 20th century because companies just practically couldn't get that big with manual technologies.

The largest US company in 1929 had revenues of about $1.5bn - roughly $30bn in 2023 dollars, which wouldn't even put it in the Fortune 100 today. Walmart today has revenues of about $600bn, which is roughly equivalent to 6x the top 50 companies in the US in 1929 combined!

It's mind-blowing to me that economics is still using these ridiculously old, flawed models whose assumptions are less true than ever. To me, econ 101 should be teaching how irrational consumers and lawmakers are, what state capture is, monopoly-seeking behaviours as the primary modern driver of profit growth, etc...

Re: Why is inflation so sticky? It could be corporate profits

#39

Post by autoexec »

Rury wrote: post #35
autoexec wrote: post #30

Earlier quoted context omitted.

The problem is that people don't have "extra" money, they have record amounts of debit and rising homelessness. The depressingly small amount of money people got in aid from the government kept their lights on, kept food on the table, and helped them transition to working/schooling at home at a time when they couldn't go to work and had no income at all. What little "extra" money made it into the hands of regular Ame…

You're right in that (some) people don't have "extra" money. Most people can't print themselves money. However, some people do have "extra" money, particularly people who have access to the money printer, or who are bailed out by the people with the money printer. Guess who buys most of the government debt, allowing the government to overspend? The Fed. Government spending isn't in a vacuum either. Every dollar the g…

I can't argue that government spending isn't a problem. It really is. In particular it's where the money is going, how it's being accounted for, and how much benefit the average American sees from that which is way out of whack.

The pandemic had the government printing a ton of money and handing it out to some very rich people, but does giving more money to a person who already had enough money to afford whatever they want really drive up the prices on a gallon of milk?

Re: Why is inflation so sticky? It could be corporate profits

#40

Post by krsrhe »

snapplebobapple wrote: post #16
jfengel wrote: post #5

Earlier quoted context omitted.

That is what the first two weeks of economics teaches. The rest of the curriculum is about how wrong that is.

Thats not really accurate. The rest of the curriculum is about how that is still correct but how people attempt to gain market power so they can stop others undercutting them, bringing market back to efficiency.

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