Since the US Federal Reserve announced rapid and possibly massive interest rate hikes last week, the inflation debate seems to have been decided, at least in the USA: Aggregate economic demand exceeds production potential and must therefore be brought back into balance by the money watchdogs with heavy artillery. This also increases the pressure on the ECB to act, which has so far wanted to wait before turning around interest rates.
But what if there is a “blind spot” of inflation? A blind spot hiding a reason for the price surge that we have so far overlooked? At least that’s what the US government believes, and that’s why its antitrust watchdogs are focusing on the pricing power of companies in those sectors in which not only prices but also profits have risen enormously.
Indeed, in the second year of the pandemic, non-financial US corporate earnings were at their highest levels in decades. In the second and third quarters of last year, American companies reported their highest profit margins in more than 70 years. And if tech giants Microsoft, Apple and Tesla’s stunning quarterly results last week are any signal to the rest of the economy, that trend has continued into the final quarter of 2021.
US President Biden suspects that some companies are taking advantage of the economic crisis and has therefore ordered the Federal Trade Commission (FTC) antitrust watchdog to investigate alleged anti-competitive behavior in the energy sector. There are similar complaints in the US about the pricing power of companies in the meat and logistics industries. “Market concentration has allowed giant corporations to hide behind claims that costs have increased in order to increase their profit margins,” said Elizabeth Warren, a left-liberal senator and a leading figure in the US Democrats.
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In Europe, too, imbalances between supply and demand in certain sectors are an incentive to massively increase prices and profits: “In addition, companies would pass on higher costs due to supply and transport bottlenecks to consumers and also expand profit margins if demand is strong,” writes the Bundesbank in an analysis from the end of December 2021. And the wild west methods with which some German electricity and gas providers are currently exploiting the high energy prices to put their customers in a headlock and secure their profits confirm the temptations of market power.
Competition watchdogs chase inflation
The microeconomic view of the current price surges is important. He reminds us that inflation is not only a macroeconomic phenomenon, but that the price level is also determined by the behavior of companies in individual sectors.
However, the connection between pricing power and economic hardship has not yet been adequately examined from a scientific point of view. There has long been high market concentration in many sectors of the US economy. The pandemic has only expanded the opportunities for abuse. In addition, the tech industry has been showing for years that market power can also go hand in hand with falling prices.
What is more important for the current inflation debate, however, is that competition law can at best be used to combat massive price hikes in the medium and long term. This is not only due to the fact that antitrust proceedings take far too long to achieve quick success. Legislators often only intervene against the abuse of pricing power when it is too late and prices and profits have already risen massively.
However, historically extraordinarily high profits are always an important argument for workers and their unions to increase their wage demands – especially in times when inflation is making their lives difficult. If you want to prevent an inflationary wage-price spiral, you also have to keep an eye on the development of profits.
More: Union and FDP are skeptical about price increases