Inflation and the Profit-Price Spiral

Episode Summary

Executive Summary: The episode examines why inflation persisted after 2021 and argues that corporate profits—not wages—played a major role. Economist Isabela Weber and Kansas City Fed economist Andrew Glover suggest a “profit price spiral” or “seller’s inflation,” where bottlenecks, expectations, and pricing power let firms raise markups and amplify inflation. The piece also explores whether policy should target profits rather than workers.

Main Topics: Why the feared wage-price spiral did not materialize (Priority: 5/5): The show opens by revisiting the 1970s-style concern that workers’ wage demands would keep inflation alive. Instead, wages generally lagged inflation, and the feared spiral did not take hold in the U.S. or Europe. The rise of the profit-price spiral idea (Priority: 5/5): The episode introduces a newer theory: inflation can be sustained when firms raise prices faster than costs, increasing profits and feeding additional inflation. Isabela Weber’s seller’s inflation argument (Priority: 5/5): Weber argues that severe bottlenecks and shortages weaken competitive pressure, allowing firms to increase markups and profits, especially during structural transitions like postwar recovery or the pandemic. Kansas City Fed data on markups and profits (Priority: 5/5): Andrew Glover’s research using broad U.S. industry data finds that markup growth was a major contributor to 2021 inflation and that profit growth accounted for a large share of price increases. Inflation expectations and self-reinforcing pricing (Priority: 4/5): The episode stresses that firms may raise prices in anticipation of higher future costs, and that such expectations can themselves help generate inflation. Policy debate: interest rates vs. price controls or windfall taxes (Priority: 4/5): Weber criticizes relying mainly on interest rates, which hurt workers, and proposes targeted tools like windfall profit taxes; the episode notes ongoing disagreement among economists about how to respond.

Key Arguments: Inflation is not only driven by wage growth; it can also be driven by rising corporate profits and markups. During severe bottlenecks, firms face weaker competitive pressure and can raise prices without immediately losing customers. The pandemic created conditions similar to postwar bottlenecks, making profit-driven inflation plausible. Glover’s research suggests corporate profit growth accounted for nearly 60% of 2021 inflation, with markups contributing more than half. Profit growth has historically mattered after recessions, but it was overlooked when inflation was otherwise low. Higher inflation expectations can encourage firms to raise prices preemptively, potentially creating a profit-price spiral. Some economists now see corporate pricing behavior as a plausible inflation mechanism, even if not a complete explanation. Weber argues that anti-inflation policy should not rely solely on higher interest rates because that mainly burdens workers and consumers.

Data Points: U.S. 2021 inflation attributable to corporate profit growth: nearly 60% - Andrew Glover’s analysis of markup growth and inflation in 2021 Corporate profit growth contribution to inflation: more than half - The Kansas City Fed study found markup growth was a major contributor to 2021 inflation Normal profit contribution to inflation: less than a third - Glover said profit growth typically contributes less than a third of inflation Profit margin spike years after World War II: 1946-1947 - Weber notes profit margins last shot up on a large scale right after the war Fed inflation target: 2% - Glover says anchoring expectations around 2% helps prevent a profit-price spiral Post-recession years with profit-driven inflation patterns: 2009, 2002, 1976 - Glover says profit growth shows up in multiple years following recessions Year Weber published her op-ed: December 2021 - She argued inflation included an overlooked explosion in corporate profit margins Year the “price spiral” term was coined: January (current year referenced in episode) - Lael Brainard used the term “price spiral,” which the episode says is catching on Windfall profits policy proposal: windfall profit tax - Weber proposes taxing firms that receive unexpected profit surges

Pivotal Quotes: "there is an overlooked component in inflation, which is an explosion in corporate profit margins" — Isabela Weber: Her December 2021 op-ed arguing profits were being missed in the inflation debate "We find evidence that markup growth was a major contributor to inflation in 2021" — Andrew Glover: From Glover’s Kansas City Fed research on U.S. markups and inflation "one of the outcomes of that would be that we don't see a profit price spiral" — Andrew Glover: Explaining why the Fed wants anchored inflation expectations

Implications: Listeners should see inflation as partly a pricing-power problem, not just a wage problem. The debate may push policymakers toward targeting profits, markups, and bottlenecks, not only demand through higher interest rates.