AILSA CHANG, HOST:
When inflation started getting bad, there were concerns that workers would create a wage-price spiral by asking for pay raises. Sarah Gonzalez with our Planet Money podcast says there are now concerns about a totally different kind of spiral.
SARAH GONZALEZ, BYLINE: There is a formula for what causes inflation, and it's very simple. It is costs plus corporate profits. That's how you get inflation. If costs increase for a company because workers want higher wages or because the cost of raw materials go up, you can get inflation. If corporate profits go up, you can get inflation. Now, you may remember a lot of economists last year saying that corporations or corporate greed was not driving inflation, but corporate profits could be a driver of inflation. It's right there in the inflation formula, says Andrew Glover at the Federal Reserve Bank of Kansas City.
So you're an economist at the Fed.
ANDREW GLOVER: Yes.
GONZALEZ: Kind of fancy.
(LAUGHTER)
GLOVER: I guess. But it's Kansas City, so it's a less fancy city.
GONZALEZ: Andrew at the not-quite-fancy Kansas City Fed wanted to assign how much costs contributed to inflation at the beginning of inflation and how much profits contributed. To do this, he had to look at basically every type of good or service sold in the U.S.
GLOVER: So, you know, McDonald's would be in here. Walmart would be in here. Ford would be in here.
GONZALEZ: Pepsi.
GLOVER: Yeah.
GONZALEZ: Coca-Cola.
GLOVER: Yeah.
GONZALEZ: Ketchup makers, whatever.
GLOVER: Yes. Yes.
GONZALEZ: Normally, Andrew says, profits contribute less than a third to inflation. He found that in 2021, corporate profits could account for about double that, nearly 60% of inflation, meaning it was not costs driving inflation. It was corporate profits. Now, some economists hear this and think this is proof that companies were just using inflation as an excuse to gouge customers. Andrew does not think this. He thinks companies likely raised prices not because their costs went up in 2021 - because they did not, really - but because they were anticipating that their costs would go up a lot in 2022. And by the way, costs did end up going up in 2022, although companies still made record profits.
So they overanticipated how much costs would go up. They, like, overshot it.
GLOVER: Let me see. It is possible that firms, by anticipating higher costs, contributed to the inflationary pressures that actually led to higher costs.
GONZALEZ: Yeah, corporations anticipating higher inflation could have been why we got higher inflation. And Andrew says this could spiral.
GLOVER: If we were to get in a situation where not only in 2021 did firms expect higher inflation but in 2022, they expected it, 2023, they expected it, then we very well could end up in a world where profits are always a major contributing force to inflation.
GONZALEZ: This is why one of the Fed's goals is to keep inflation expectations anchored around 2%.
GLOVER: One of the outcomes of that would be that we don't see a profit-price spiral.
GONZALEZ: A profit-price spiral or a price-price spiral. This is a new phrase. Usually the worry around inflation is a wage-price spiral, where workers keep asking for pay raises and corporations keep raising prices to afford the raises, and it spirals. A price-price spiral is when corporations raise prices by more than the increase in their costs in a way that perpetuates inflation. Sarah Gonzalez, NPR News.
(SOUNDBITE OF MEAT PUPPETS SONG, "I'M A MINDLESS IDIOT") Transcript provided by NPR, Copyright NPR.
