The New York Times published an article arguing that most of the cases of price increases for food and goods are not explained by economic reasons, but are clear examples of pure speculation.
Companies that have historically been able to keep prices low in order to profit by gaining market share are instead using the cover of inflation to raise prices and increase profits. Consumers now expect higher prices and companies are taking advantage of this. The poor and those on fixed incomes are the hardest hit.
As the CEO of Hostess told shareholders last quarter, “When all prices go up, it helps.” The head of research at Barclay's echoed this: "The longer inflation lasts and the more widespread it is, the more reason it gives companies to raise prices," he told Bloomberg. More than half of the retailers acknowledged this in the survey.
Executives reported their record quarterly earnings to investors during profit and loss calls.
Federal Reserve Chairman Jerome Powell said that sometimes businesses raise prices simply "because they can." Companies have pricing power when consumers have no choice.
This is sometimes because the demand for basic consumer goods such as toilet paper, toothpaste, and hamburger meat is relatively inelastic. In other cases, price power comes from concentrated market power. In industries like meat processing and transportation, where the giants sometimes own more than 80 percent of the market, it's easier to get big markups when there aren't big competitors.
Despite rising labor, energy and material costs, the rate of return hit a 70-year high in 2021.
Despite clear evidence that price increases are in most cases not justified by rising costs, there is a fierce debate in Washington about what policymakers should do to address this problem. These debates are not primarily about the cause of price increases, but rather about whether politicians should play a role in ensuring fair prices.
Most economists believe that markets are efficient scarcity allocators and that governments should have no role to play in protecting against unfair pricing. They argue that raising prices will help reduce demand and reduce shortages by effectively rationing goods, depending on the ability of consumers to pay.
If sellers go too far in raising prices, buyers will simply move on to a competitor. But what if there are no competitors? Don't worry: really exorbitant markups almost guarantee new companies entering the market.
Many economists even argue that publicly traded companies have an obligation to generate as much profit as possible for shareholders. If they see any interventionist role for the government, it is to suppress demand by raising interest rates by the Federal Reserve, a crude policy tool with a high probability of plunging the country into crisis.
Overall, businesses are exploiting supply chain bottlenecks, a war overseas, and a pandemic to drive record profits at the expense of consumers. We don't argue that the system works well for Fortune 500 companies and Wall Street investors, but we want lawmakers to stop speculation that has gone too far.
Although economists may be reluctant to admit it, prices are not immune to political considerations. In fact, 38 states and the District of Columbia are already limiting the rise in prices of certain commodities with price gouging laws designed to prevent companies from capitalizing on abnormal situations such as pandemics and hurricanes that lead to shortages and price gouging.
In other words, most state legislatures have decided that while stockholders would like bottled water to sell for $100 a gallon and gas for $5, this is unfair and not in the public interest.
Legislators must do more. They should pass a federal price cap law to give regulators the power to prevent companies from exploiting crises to make more profit. Last week, Congressional Democrats announced plans to do just that. They could go even further to discourage speculation with a tax code, whether it be raising the corporate tax rate or imposing windfall taxes like those proposed by Senators Sheldon Whitehouse and Bernie Sanders.
This is not new, the government took similar measures during World War II and as recently as 1980 regarding oil and gas. Regulators, even without new legislation, must start by enforcing existing laws, including laws against price fixing, price gouging and collusion.
The supply disruptions we're experiencing are just a dress rehearsal for what's to come. Climate change will lead to more and more severe and frequent natural disasters that will destroy crops, flood manufacturing plants and disrupt trade routes. The White House Council of Economic Advisers acknowledged this in their latest annual presidential economic report.
Future deficits will undoubtedly bring more opportunities for profit, and politicians need to close their introductory economics textbooks and take a realistic look at the economy. The question we need to ask is not whether companies will exploit these disruptions - we know they will - but what we can do to stop it, otherwise companies will simply make others pay the price.