This week kicks off the second-quarter earnings season, when firms in the US report on how much money they made (or didn't make) from April through June of 2023. It also brings a slew of new inflation data.
A growing group of economists say that those two things are very closely linked.
Welcome to the age of the price-price spiral, where companies hike their prices beyond the increase in their costs to boost profits.
What's happening: Inflation is coming down, finally. Prices of oil, food and materials used in production are falling after years of increases due to pandemic-era shutdowns, supply chain clogs and geopolitical turmoil.
But that doesn't mean that the prices of consumer goods are falling. In fact, in many cases, they're still going up quite quickly.
Federal Reserve Chair Jerome Powell has often warned that wage growth has to slow down for prices to ease. If employment doesn't come down, he says, inflation won't return to 2%.
But a number of Fed economists are pointing to another culprit: corporate profits.
A recent report from the Kansas City Fed found that nearly 60% of US inflation in 2021 (the year prices really began to surge) was because of an increase in corporate profits. In previous years, corporate profits contributed to about a third of price growth.
It's not just in the US, either. The International Monetary Fund has projected that corporate profits now account for nearly half of all euro area inflation.
Christine Lagarde, president of the European Central Bank, made note of the problem in a recent speech.
The "nature of the inflation challenge in the euro area is changing," she said, pointing out pandemic shocks are largely past and companies are now raising prices for different reasons.
Société Générale's global strategy economist, Albert Edwards, wrote in a note earlier this year that "the primary driver" of high inflation is companies taking advantage of customers by charging more to make an extra profit.
Customers expect price rises because they read about inflation in the press, wrote Edwards, but companies have "clearly taken advantage of rising inflation expectations" and have increased their prices even as their costs have remained the same, adding to their bottom line.
Edwards says that instead of "calling this out as the primary cause of high inflation, central banks have instead chosen to focus on rising nominal wages as threatening to embed higher inflation -- the so-called 'wage-price spiral.'"
Simply put, it's not the wage-price spiral we need to worry about, it's the price-price spiral.
In a January speech, Lael Brainard, former Fed vice chair and current director of the National Economic Council, expressed worry that a price-price spiral could ultimately tank the economy by turning consumers off from spending.
Coming up: Two major measures of inflation in the United States are out this week -- the Consumer Price Index on Wednesday and Producer Price Index on Thursday. On Friday morning, earnings reports for the second quarter kick off with JPMorgan Chase, Wells Fargo, Citi and Blackrock all reporting.
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