The business outlook for next year is characterised by concerns about inflation. Is it a temporary phenomenon linked to problems in the supply chain as consumer demand has picked up again this year? Or is it permanent? Central bankers are considering their usual anti-inflation tool, interest rate hikes and the removal of public measures to stimulate the economy. According to US economist Robert Reich, the real problem is more a matter of regulatory failure in the area of competition law.
Reich, who served as Secretary of Labor under the Clinton administration, argued that a lack of competition allows companies to simply raise prices and blame alleged inflation. According to him, the influence of market fundamentalism (the market is always right) has made governments less willing to enforce competition laws.
Adjustment to nearshoring
Reich is presenting a divergent view. Take Yves Mersch, a former member of the European Central Bank’s Governing Council. He recently stated during a Luxembourg for Finance webinar that most of the causes of inflation at this stage are temporary and that they are expected to decline.
However, if adjustments to “nearshoring” or on “shoring back” the global supply chains did not go as smoothly as expected or the savings rate did not decrease in response to inflation, he said “the risk of more permanent price increases would increase”.
“Above all, I think central bankers will have to look very closely at future wage developments,” said Mersch. “If …. there are demands, for example, in the largest economy in Europe, in Germany, [for] 5% increases, then, of course, that would have to trigger a response from the central bank.”
Powell’s medicine
Reich is pointing to other causes of higher prices. On the recent decision by US Fed Chairman Jerome Powell both to end the bond-buying programme and to raise interest rates probably sooner than expected, Reich wrote that “Powell’s medicine has nothing to do with the real reason for inflation: the increasing concentration of the American economy into the hands of a relative few corporate giants with the power to raise prices,”
“If markets were competitive, companies would keep their prices down in order to prevent competitors from grabbing away customers.” Reich wrote on his website. “But they’re raising prices even as they rake in record profits. How can this be? The answer is they have so much market power they can raise prices with impunity.”
Companies pass on costs
This is by no means a purely American phenomenon, as Keith Wade, chief economist and strategist at Schroders, pointed out in his outlook for 2022. “As we saw in the third quarter earnings season, companies are passing on costs, they are actually increasing their prices successfully. And of course, that’s been reflected in sales, and corporate profits,” said Wade.
Reich gave a specific example. “In April, Procter & Gamble announced it would start charging more for consumer staples ranging from diapers to toilet paper, citing ‘rising costs for raw materials, such as resin and pulp, and higher expenses to transport goods’. That was rubbish. P&G continues to rake in huge profits. In the quarter ending September 30 (after its price increases went into effect) it reported a whopping 24.7 percent profit margin. It even spent $3 billion during the quarter buying back its own stock.”
“P&G faces almost no competition,” Reich argued. “The lion’s share of the market for diapers (to take one example) is controlled by just two companies – P&G and Kimberly-Clark – which coordinate their prices and production. It was hardly a coincidence that Kimberly-Clark announced price increases similar to P&G’s at the same time P&G announced its own price increases.”