Two stories today from The New York Times once again focus on inflation and the Federal Reserve's determination to stamp it out. The Personal Consumption Expenditures index is still climbing, reports one story, "reflecting the difficult path ahead for economic policymakers as they weigh whether to raise interest rates again to bring down stubborn price increases."
Consumer spending is on the rise, announces the other: "Americans’ income and spending both rose in April, a sign of economic resilience amid rising prices and warnings of a possible recession."
American consumers are spending more money than before when they go to the grocery store or make other purchases, worries the Fed. That's inflationary, and the traditional way central banks deal with inflation is to declare that Too Many People Have Jobs These Days, requiring policymakers to find those people and swing an official Policy Bat at their kneecaps.
The easiest way to do that is to raise interest rates to tamp down new large-scale business investments and expansions, weakening the job market and making Americans, on average, poorer than before. All of this presumes that the inflationary pressure is indeed caused by Americans simply having too much money for their own good. But what if it's not that? What if the inflationary pressure is coming from profit-taking price hikes in increasingly monopolistic market sectors?
That's the argument Fed critics have recently been making—or rather, screaming: If consumers aren't spending more because they want to, but because they are being forced to, then the normal policy prescriptions don't apply and the Fed is treading on very dangerous ground. Suppose consumers run out of money before federal policymakers thought they would, and interest rates are still cranked up when it happens. In that case, the economy immediately slides into recession and the Fed's new task is to keep those recessionary pressures from, say, a new round of incompetence-fueled bank failures.
The catch to all of this is that pretty much everyone agrees that corporate price increases are fueling this round of inflation, and that's the subject of a third Times piece, this one largely ignoring the political and policy implications to bring us the Straight Damn News: Companies are raising the prices of consumer goods because they can.
The reasons for previous price increases are fading, as pandemic procurement-chain turmoil and the news from Ukraine both settle. Raw material prices are easing. Corporate giants, however, are continuing to ratchet prices even higher, and have been raking in windfall profits as a result.
At the end of April, [PepsiCo] reported that it had raised the average price across its products by 16 percent in the first three months of the year. That added to a similar size price increase in the fourth quarter of 2022 and increased its profit margin.
“I don’t think our margins are going to deteriorate at all,” Mr. Johnston said in a recent interview with Bloomberg TV. “In fact, what we’ve said for the year is we’ll be at least even with 2022, and may in fact increase margins during the course of the year.”
The bags of Doritos, cartons of Tropicana orange juice and bottles of Gatorade drinks sold by PepsiCo are now substantially pricier. Customers have grumbled, but they have largely kept buying. Shareholders have cheered. PepsiCo declined to comment.
Colgate-Palmolive is also singled out for a 12% increase in prices—and for their 40% share of the "global toothpaste market."
Most of the piece is filled out with appropriate quotes from experts and less-expert experts, but none argue that what we're seeing is not corporate margin-hiking. Companies with gargantuan market power are keeping post-pandemic price hikes in place and are now boosting them even further because Money, that's why.
The closest we get to an objection to this analysis is when Mercatus Center wag David Beckworth weighs in to argue that the price hikes aren't "profit-led," companies are just taking advantage of consumers coming out of the pandemic with a bit more cash than they had expected to have.
Mr. Beckworth and others contend that those higher prices wouldn’t have been possible if people weren’t willing or able to spend more. In this analysis, stimulus payments from the government, investment gains, pay raises and the refinancing of mortgages at very low interest rates play a larger role in higher prices than corporate profit seeking.
“It seems to me that many telling the profit story forget that households have to actually spend money for the story to hold,” Mr. Beckworth said. “And once you look at the huge surge in spending, it becomes inescapable to me where the causality lies.”
That would be the reverse-twist argument: Companies like PepsiCo or Colgate-Palmolive hardly have a choice other than to crank up product prices by double-digit percentages. Consumers came out of pandemic lockdowns with stimulus money and mild pay gains, and you can't ask international corporate giants to not try to swipe that money for themselves.
The catch, however, is that if lower-income consumers are still somehow coasting on the scraps of federal and state stimulus checks, those scraps will be gone very soon. Fed critics worry that policymakers are misdiagnosing the inflationary problem here, and that consumers are spending more money now only because they built up savings when they could not spend money during the pandemic. The current boom is a precariously short phenomenon, according to that thinking: Once Americans have made those delayed purchases (home improvements, recreational outings, and other one-time expenditures), it's over. It's delayed purchasing, not new purchasing that we're seeing, and delayed purchasing may already be starting to dry up.
So it's a bit weird that we're now on the cusp of a possible recession because consumers weren't able to spend during pandemic lockdowns, have come back to spend all that money at once, and have thus frightened the Fed into breaking out the recessionary Kneecap Bat.
And it's even weirder when you consider that the "inflationary pressure" we're seeing is not because raw materials, transportation, or other costs are soaring, but because international corporate giants have looked at the numbers and decided that the markets will bear their own efforts to squeeze the last remains of consumers' alleged pandemic savings into their own business coffers.
For all the Fed's insistence on curbing the "inflationary pressure" of consumers being willing to spend "too much" money at once, Fed critics have been confident that rate hikes are solving the wrong problem. It's not that consumers are spending more money willingly; they're being squeezed for it. And they're being squeezed for it because the federal government has largely abandoned the role of defending consumers against monopolistic markets. Monopoly or near-monopoly power is now considered either "good" or "inconsequential," according to the policy advocates who have largely stripped the government of the regulatory powers meant to prevent them.
Or, to put it another way:
The short version here is that the Fed is continuing to tread on very dangerous ground, looking to solve a new round of corporate profit-taking by kneecapping American consumers just enough to make those corporate price hikes unsustainable. If consumers are still buying Doritos and other consumables despite the new higher prices, the only federal policy solution on offer is to squeeze job markets until those consumers start leaving the Doritos on the store shelves.
Heaven help us if Fed critics are right and the post-pandemic surge is fueled by temporary and deferred spending rather than some new post-pandemic "normal," though. When consumers run out of savings, they run out of savings—and everything goes south in a hurry.
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