News Release

Fed’s Fix is Wrong: Inflation Caused by “Skyrocketing” Corporate Profits More Than Wages

PIA MALANEY, pmalaney@ineteconomics.org, @piamalaney

Malaney is senior economist at the Institute for New Economic Thinking. She said today: “As the White House and Jerome Powell met this week to discuss the highest inflation in decades, the Fed Chair has been explicit about the Fed’s monetary policy goals: ‘to get wages down and then get inflation down.’ The labor market has indeed been tight, with wages rising at the highest pace in years, especially at the lower end of the wage distribution. But is this the major driving force of rising inflation?

“Work by Servaas Storm for the Institute for New Economic Thinking and other analysts suggest that very little of the rise in inflation can be traced to wages. As most Americans know from their own experience, wages are running well behind inflation and have been for many months. What is skyrocketing is corporate profits. As numerous studies indicate, economic concentration in the U.S. has increased oligopoly power in several industries, allowing corporations to raise prices and profits. The latest flap about baby food is a perfect example. The industry is highly concentrated.
“The plain fact is that import prices from supply shortages and other problems explain a great deal of the rise in American prices. But that is hardly responsive to Fed interest rate rises. And anyway interest rates are, at best, a blunt tool: empirical evidence has shown that historically it requires very large increases in interest rates to bring down inflation even by small percentages, with enormous costs to employment and growth.”