When you hear economists or officials fretting about a "wage-price spiral," they're referring to the hard-to-break spiral that results from a too-hot economy. The basic idea is wages go up, so people buy more, pushing prices up, making workers demand higher wages, and so on.
It's a real concern, though not an especially pressing one for our present economic situation. Right now, economists are increasingly worried about a so-called price-price spiral, my colleague Nicole Goodkind writes. That's when big companies hike their prices beyond the increase in their costs to boost profits.
Here's the deal: Prices of oil, food and materials used in production are finally coming down after three solid years of lockdowns, supply chain clogs and geopolitical turmoil.
But that doesn't mean the stuff you buy day-to-day is getting cheaper. In fact, in many cases, those costs are still going up quite quickly.
Why? Well I hate to blow your mind here but it turns out corporations are greedy as all hell.
As Nicole explains: Nearly 60% of US inflation in 2021 (the year prices really began to surge) was because of an increase in corporate profits, according to a recent report from the Kansas City Fed. In previous years, corporate profits contributed to about a third of price growth.
It's not just in the United States, either. The International Monetary Fund has projected that corporate profits now account for nearly half of all euro-area inflation.
Earlier this year, Société Générale's global strategy economist, Albert Edwards, said "the primary driver" of high inflation is companies taking advantage of customers by charging more to make an extra profit.
At this point, you expect to pay more for stuff because you read the news and you've internalized that things are just expensive right now. But companies have "clearly taken advantage of rising inflation expectations" to pad their margins, Edwards wrote. "Simply put, it's not the wage-price spiral we need to worry about, it's the price-price spiral."
The problem with that — apart from it just being a raw deal for all of us — is that it could tank the economy by turning off its most vital engine, the hearty appetite of the American consumer. Our collective devotion to shopping through good times and bad is what keeps the US economy humming, accounting for some two-thirds of our gross domestic product.
Bottom line: Wages "do not appear to be driving inflation in a 1970s-style wage–price spiral," economist and former Fed Vice Chair Lael Brainard said in a speech earlier this year. "Overall, the labor share of income has declined over the past two years and appears to be at or below pre-pandemic levels, while corporate profits as a share of GDP remain near postwar highs."
LOOK AHEAD: Tomorrow, economists widely expect to see a 3.1% increase in consumer prices for the year ended in June. If the Consumer Price Index reading comes in as expected, it'd mark a massive victory for the fight against inflation. Remember: A year ago, in June of 2022, the CPI shot up to 9.1%, the sharpest increase in 40 years.
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