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New study aims to learn whether corporations are to blame for current inflation


Inflation has dropped sharply from what it was a year ago this time, but prices are still rising at roughly double the rate they did before the pandemic. So who's to blame for these price hikes? Many fingers are pointed at one villain - corporations. Darian Woods from our daily economics podcast, The Indicator, spoke with an economist who went looking for evidence.

DARIAN WOODS, BYLINE: Chris Conlon is by no means a big business sycophant. He never set out to give corporations a pass.

CHRIS CONLON: I'm very prone to think (laughter) firms are colluding and doing all kinds of things they shouldn't be doing. A lot of my work is trying to figure out - like, can we use data to figure out when firms are trying to do terrible things to rip off consumers?

WOODS: Chris is an economics professor at New York University, and he studies how businesses make decisions, like pricing their products and competing with other companies. And earlier this year, Chris was tapped by somebody at the American Economic Association.

CONLON: Basically, someone came up to us and said, hey, can you tell us something about what's happening with rising markups and what it meant in the last few years?

WOODS: So Chris and his co-authors set out to answer this question. If you've got prices rising higher in a given industry, does that correlate with corporations raising their markups? In other words, is higher inflation linked to higher profit margins? Chris and his co-authors built on a data set that estimated the markups for over 6,000 publicly traded companies over the last several decades, and then they zoomed in around the recent inflation episode.

CONLON: We expected to see, at least in some industries or some sectors, at least some correlation between the people who were increasing profit margins and the places that prices seemed to be going up the fastest. And we were kind of surprised when we just found almost no correlation whatsoever.

WOODS: So prices have gone up around the economy, more in some industries, less in others. Some companies got more profitable. Some got less profitable. Just because Corn Flakes or Cheerios went up in price didn't mean that Kellogg's or General Mills were necessarily more profitable. Now, there is an asterisk here around the middle of 2021 and 2022.

CONLON: What we did see in 2021 was we did see a bump in profits across the board when you look at all corporations taken together.

WOODS: ...A time when we also started to see a rise in inflation.

CONLON: If you're a firm, and you know inflation is coming, you want to raise your prices sooner rather than later. 'Cause if you raise your prices sooner, you can make a quick buck. And if you wait too long - if you wait for your costs to go up, now you're going to be the one firm - you know, why are your earning so bad? Everybody else made a ton of money. And the answer is, well, we were kind of slow to react. That's the last thing you want to say as a CEO. So once you think the inflation party has started, you kind of want to get to the front of the line.

WOODS: But then, costs started to catch up with businesses in 2022. And Chris says corporate profits have been declining since about June of last year.

CONLON: Now, if you've been paying attention to inflation, inflation is still pretty high. It's still sort of unacceptably high for the Federal Reserve.

WOODS: It's much higher than the target of 2%.

CONLON: Way higher than the target of 2%. And so, you know, the idea that, kind of - are these higher profits causing inflation? We know they both went up in 2021. But in 2022 and 2023, it looks like they've started to decouple.

WOODS: Chris says there's another reason prices can go up more than costs - an increase in demand, which, it could be argued, points the finger back to you and me.

Darian Woods, NPR News.

(SOUNDBITE OF MUSIC) Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Darian Woods is a reporter and producer for The Indicator from Planet Money. He blends economics, journalism, and an ear for audio to tell stories that explain the global economy. He's reported on the time the world got together and solved a climate crisis, vaccine intellectual property explained through cake baking, and how Kit Kat bars reveal hidden economic forces.