Companies might be partly responsible for inflation, but you can contribute to lowering it

Inflation rates in the US almost quadrupled in 2021 and 2022. The annual inflation rate in June 2022 was 9.1%. Between 1991 and 2019, year-over-year inflation averaged about 2.3% a month and only exceeded 5.0% on four occasions. Americans had not paid such high prices since the 80s.

Higher prices resulted from several factors that aligned together: the reopening after the pandemic, increased fuel and energy costs, the war in Ukraine, and a supply chain tangle.

The pandemic was a sudden stop in our way of consuming and producing. After it stopped being a priority and the world moved again, all motors were trying to start at once. That caused an initial inflation that policy-makers thought was temporary. They were wrong.

According to Forbes, a Gartner survey found that 76% of supply chain executives say their company suffered more frequent disruptions than before the pandemic in 2022. The global supply chain faced political unrest, a shortage of truck drivers, port congestion, and an imbalance of shipping containers.

The war also altered prices, especially in Europe. The war has demonstrated that European countries are highly dependent on Russian hydrocarbons. Therefore, energy and fuel prices are at an all-time high.

The world scenario looks grim, but this does not account for all the inflation that the US is facing. According to a Federal Reserve Bank of Kansas City study, companies may be responsible for a significant percentage of high prices.

The researchers, Andrew Glover, José Mustre-del-Río, and Alice von Ende-Becker, questioned if the record corporate profits of 2021 contributed to inflation.

Imagen: Roberto Júnior / Unsplash

They explained that profits are not related to inflation. However, it is directly affected by growth in the markup, the difference between production costs and a product's price. It accounts for the margin of profit a company makes.

The study concluded that "markups could account for more than half of 2021 inflation." That year markups grew by 3.4%, the investigation claims, whereas inflation was 5.8 percent.

The researchers explained that companies raised their prices anticipating production costs rising and not only responding to higher costs. Those increased prices, in turn, increased inflation.

However, a recent feature by the Wall Street Journal described how consumers are stopping or slowing the prices from rising. The journal talked to representatives from companies in different sectors that claim they can no longer increase costs and maintain demand.

According to WSJ, consumers hit the ceiling on prices they were willing to pay last year, so they started to cut back on purchases. Unit sales in categories like general merchandise (including home decor and small appliances) dropped by 7%.

In more crucial basic necessities, like food and beverages, Americans paid 10% more but bought 3% fewer units, as reported by WSJ. Those numbers suggest consumers were willing to spend more in this category but bought fewer items in return.

Another red flag for the companies contacted by WSJ was the performance of their products during holiday shopping. Sales increased, but profit was lower than expected because consumers approached only the items on discount.

However, according to WSJ, even if consumers discourage companies from raising prices, fed officials worry other factors could increase inflation. Besides all the other factors already mentioned, they are concerned the reopening of China could spark demand.

Fed officials also told WSJ that, with a record-low unemployment rate, the job market could increase salaries and drive inflation up. Another option is that higher prices will encourage workers to ask for salary raises and then increase inflation. We will have to see what 2023 has in store.

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