Sometimes, the internet can be a wonderful thing. Even more rarely, sometimes Twitter can be a wonderful thing.
You would have read in the paper the back and forth over the key drivers of inflation. One idea, that gets many folk very angry, is the idea that firms have suddenly and brutally decided to wield their market power, and have pushed up prices regardless of societal norms about profiteering (making money unfairly during a crisis, like say tripling the price of food in war-time, when only a doubling would be warrented).
And, this belief has real world consequences. Politicians contemplate drawing up legislation to attack margins (sometimes, reasonably in terms of adjusting the Petroleum Rent Resource Tax, but often reactively, due to emotion, and contemplate very large taxes independent of merit) with significant effects on stock and sector valuations.
So, with this debate in mind, much work has been done to show that “greedflation” isn’t the culprit. We can explain inflation using fairly standard models (after the fact!, not a lot of economists saw it coming in the first place) and can debunk greedflation with the below work referenced by Chris Edmond.
I picked up that paper, tweeted my headline thoughts, and Chris replies, with a very clear explanation.
Now, you don’t have to read the paper, and, you know that corporate greed, a wonderful motivator and arguably key driver of economic growth over the long run, isn’t to blame here.
Demand shocks should be positively correlated with firm markups (people queing out the door of my bakery, I can’t get extra staff at a moments notice, there’s no free ovens to bake more, what do I do; I raise my prices).
Supply shocks should be negatively correlated with firm markups (I, a homebuilder, promised to build you a home under contract, and 12 months from when we both agreed to that contract I find raw material inputs like timber and concrete are vastly more expensive, I can’t get tradespeople, and my margin to deliver the product is going to be deeply underwater).
And again, this is an “on average” concept. Clearly, a supply shock like the oil price going to the moon will be fabulous for the margins of a handful of oil and gas companies (few in number) and bad for everyone elses margins (the many other companies that are upstream of oil extraction).
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