[acslater00]

Fake news.

This is a measure of where inflation "goes", not what fuels inflation. The narrative that profits are "fueling" inflation is completely made up and the people pushing it are lying to everyone for political reasons.

Inflation is caused - in most countries - by excessively loose monetary policy (sometimes fiscal policy, sometimes both). If government policy creates inflation (average prices go up) that money can flow to a domestic labor or domestic investors or leave the country. This depends on supply-side factors that are basically orthogonal to the inflation question. It is true that in the most recent round of inflation it primarily led to increased corporate profits.

There is a theory from the 80s called the wage-price spiral [Blanchard] that talks about how inflation (which is initially caused by fiscal or monetary policy) can become self-sustaining if wages and prices are set in a staggered back-and-forth kind of way, as workers react to higher prices by demanding raises, and firms react to higher labor costs by raising prices. However, there is no serious theory that such a process would happen with profits. That makes no sense at all! The exact opposite would be true, if anything. High profits in some time period would likely regress to the mean as price competition sets in. In fact, this is exactly what is happening right now, as corporate profits after spiking over the past 12 months are shrinking.

The "profit-price spiral" narrative is being pushed by the same disingenous idiots pushing the "greedflation" narrative - it is not a serious attempt to explain inflation, it is an attempt to use reasonable-sounding economics words to blame inflation on companies instead of the actual culprit: governments that overstimulated their economies to such a degree that they caused both inflation and profits to spike.

[dools]

> This is a measure of where inflation "goes", not what fuels inflation. The narrative that profits are "fueling" inflation is completely made up and the people pushing it are lying to everyone for political reasons.

Inflation is an increase in price level. When prices go up, one might consider that the price of inputs has gone up, or that profits has gone up, or both.

If the inputs go up, and the price stays the same, profits would go down, and there would be no change in price level. If companies are unable to be profitable in the face of rising inputs, they will collapse.

If inputs go up, and profits stay the same, prices would increase in line with the increase in inputs, ie. an increase in price level, ie. inflation.

If inputs go up, and profits increase, then prices will increase more than the cost of inputs would dictate, ie. inflation.

You can't say that the price increase in things like fuel and food were the result of profligate government spending, because that would suggest people are taking money they received from the government as covid stimulus and increasing their consumption of food and fuel.

You can't say that price levels have increased because of increased labour costs, because real wages have declined.

You can't say that companies have increased prices only sufficiently to offset the increase in inputs, because then profits would not have increased.

What you can say, though, is that the cost of inputs went up, there was a fiscal stimulus due to covid, people had increased spending power, and companies that sell "must haves" increased their prices to absorb that increased spending power, over and above what was required to satisfy increased input costs.

Then, because price levels went up (due to increased profits absorbing additional spending power) governments increased interest rates, making things more expensive for the very people whose increased spending power had just been absorbed by said companies.

[dageshi]

If a company has for sake of argument a 10% profit margin on an item and seeks to maintain that 10% profit margin after an increase in its input costs then is that unreasonable?

In dollar terms its profits have gone up but as a percentage they haven't.

[dools]

I think it's reasonable for companies to want to have infinite profits and $0 in costs to produce. That's what they're supposed to do.

My point is that when the OP says "inflation is the result of monetary/fiscal policy" (EDIT: paraphrased, not quoted, improved accuracy of paraphrase) it's inaccurate: people did not spontaneously choose to consume more food and fuel because they had increased spending power, but those prices went up and so did profits

So some companies are able to increase prices disproportionately because of their unique position as price setters and lack of competition. They absorb any increase in spending power and/or fiscal stimulus. Increase in interest rates absorbs whatever is left over.

As those price increases filter through the economy, price levels increase further and so on.

If there was more diversity in the food and energy sectors, then prices would not have increased as much as they did, and the increased fiscal stimulus would have dissipated throughout the economy, making its way into the pockets of more small businesses.

Now: should the government not stimulate the economy? Well, I doubt it, then people would have been really in the shit.

Should the govdernment better target their stimulus? Absolutely, I know in Australia it was very inequitably distributed.

Should the government implement policies to prevent those sectors with the least competition from hiking prices to absorb fiscal stimulus meant to avoid recession, thus keeping a cap on price level increases? I think so.

And I think the linked article does a good job of demonstrating the way in which "profit-price" interactions are a better way to think about inflation rather than "wage-price" interactions, and thus why it's unreasonable to expect labour to shoulder the burden of suppressing inflation, rather than capital.

[dageshi]

I don't think op did say "inflation is the result of government spending" he said it was the result of excessive monetary stimulus. In other words the action of the federal reserve.

[dools]

OP did say:

> (sometimes fiscal policy, sometimes both)

Although it's also clear that monetary policy alone cannot stimulate the economy, otherwise there would have been a correlation between ZIRP and economic growth, and there wasn't.

Fiscal policy does stimulate the economy, and if properly targeted this can be done without inflation risk.

OPs main claim here is that the article is "fake news" because government monetary and/or fiscal policy is the main driver of inflation. While it may be the case that governments did stimulate the economy, the bulk of price level increases are not increased caused by demand (ie. people deciding to buy more stuff) but a combination of increase in inputs (supply problems) and monpolistic price setting by poorly regulated companies.

I concede that one might say that, in the absence of any government stimulus, there would also have been no price level increase, but I would also contend that in the absence of such a stimulus there would have been a depression and that a price level increase could have been avoided through better targeted stimulus and better regulation of companies.

[polygamous_bat]

> In dollar terms its profits have gone up but as a percentage they haven't.

Citation required.

[dageshi]

I can't say whether that's actually happening or not, all I can say is it's a reasonable explanation as to why profits would be going up for many companies.

[dools]

The article we are discussing cites:

On Thursday Qantas posted $1.4b half-year profits, tripling revenues

On Wednesday Woolworths posted a 25% rise in profits. Supermarket profits have soared on the strength of rapid food price inflation.

On Tuesday Coles net profit grew 11% in the latest half-year result announced Monday, beating forecasts.

On Wednesday Santos posted a 221% annual profit

Ampol, Australia’s largest oil refiner, reported a 30% increase in first-half net profit, buoyed by soaring petrol prices.

Commonwealth Bank posted a record $5.1b billion profit, up 9%, buoyed by extra interest income from rising interest rates

In every case the increase in profits exceeds inflation, so the increase in profits is definitely not simply a case of percentages remaining the same.

[pcthrowaway]

Who had increased spending power exactly? I was under the impression the stimulus was mainly directed towards people who had suffered wage loss due to covid.

[jrs235]

Some of the money went to folks who lost jobs. A lot of money also went to business owners who were supposed to use it "to not lay people off". Many probably didn't even need the money but took it because "free money". The number of business owners who bought new "toys" (i.e. cars, boats, etc.) or second and vacation homes during a time of supposedly difficult financial times is daunting...

Think about this: the cost to write off outstanding college loans is ~$350 billion. This amount was accumulated over a few decades. ~$700 billion was given to business owners in under a year...

[danaris]

One of the powerful things about the stimulus is that it was undirected—that money (I no longer recall the precise amount per household—$1200? $2000? somewhere in there) was just given to every household in the US.

[dools]

Well ... if you think about it the additional spending power was sitting somewhere right? People lost their jobs because other people weren't spending. The people who didn't spend, kept their money. Then the people who laid off workers, kept their money. The government added money to close the spending gap. It's a perfectly reasonable policy, HOWEVER I know that in Australia definitely (and probably in the US) it was very poorly allocated, so people and firms who really shouldn't have had any extra income were granted it and some others who really needed it, didn't get it.

On balance, increased government spending adds net financial assets to the private sector and increased taxation removes it.

So did the government need to just "tax back" the money it spent into the economy? Maybe in some ways, but certainly not from the people it gave it to and maybe not at all. BECAUSE during the time when there was a recession avoided by stimulus, the population also grew so there should have been some economic growth during that time anyway.

As such, probably, what should have happened is that the government should have done things to ensure that the (very few) parts of the economy that benefit wildly from lack of competition and dysfunctional markets (like food, energy and housing) didn't accumulate all of the growth that should have been more evenly spread around.

In Australia, we need the government to build roughly 100,000 public houses per year, and we need to dramatically increase net migration to achieve that; but since we're an economy dominated by religion, mining, finance, real estate and insurance that's unlikely to happen. We actually have a horrible housing crisis in this country because of the dramatic increase in single person households as a result of relationship breakdowns over covid and the tendency away from share housing in young people (who can afford it!), as well as an explosion in dwellings used only as short term rentals.

In the US you probably have many of the same problems. The inflation reduction act did some of the work to improve things but it took a while to get it through because Manchin and Sinema fucked the recovery for everyone (as Bernie said: "give us more democrats").

This is the best discussion on inflation I've seen:

https://www.levyinstitute.org/publications/is-it-time-for-ra...

[diordiderot]

> price competition sets in

You going to start an airline, a Telco, or meat processing plant because the others are colluding

[Auracle]

So, literally everyone is colluding then?

[mitthrowaway2]

Wouldn't they be? These days, most people and institutions who own shares of a company tend to own a similar fraction of the shares of the competitors, too.

That's the basic premise of index funds.

Presumably when they vote, their interest will be in seeing the entire index go up, not one company stealing the market share of another.

[danaris]

It doesn't require active collusion. This is one of the things that many people fail to understand about this, and many other aspects of our current systems.

When supply chain disruptions during COVID caused significant supply shortages, companies raised prices as one would expect due to the classical law of supply and demand.

By the time those shortages ended, there was so much media buzz about inflation that those companies realized, independently, that they could probably keep prices high and no one would notice.

They did this. It worked. The media still kept talking about inflation. Wages started to recover a little bit from the beating they took during the pandemic, and the Fed started talking about forcing wages down to fight inflation.

Those companies, independently, saw this and broke out in the biggest shit-eating grins ever. They raised prices again, purely to juice their profits, and still the media and Fed were only talking about inflation as if it was caused by wages.

Only now, months/years later (depending on where you start counting), is the media starting to catch up to what's actually been happening.

(And I'm sure that it's also something of an oversimplification—that the inflation hasn't been caused solely by this corporate greed. But I'm pretty damn sure that in this instance, it has been caused primarily by corporate greed.)

TL;DR: Active collusion is not necessary in a situation where multiple actors within the system can independently recognize actions that will benefit them at others' expense, and engage in them simultaneously. It is a zeitgeist, or possibly a bellwether and then flock movement, not conspiracy.

[js8]

> It doesn't require active collusion. This is one of the things that many people fail to understand

Exactly. Interested people should look up Keen & Standish critique of the theory of the firm (e.g. http://www.paecon.net/PAEReview/issue53/KeenStandish53.pdf), they have a really nice and simple computer simulation where competing firms collude only on the basis of knowing the current price, without even being aware of each other's existence.

[diordiderot]

Landlords as well https://www.propublica.org/article/yieldstar-rent-increase-r...

[yellowapple]

Landlords especially. Land value (whether you're measuring by sale price or rental value) is largely a function of economic activity or the potential thereof; landlords - even when they ain't colluding with one another - are well-positioned to respond to any growth in wages or profits by jacking up rents accordingly.

Land value taxation paired with a citizens' dividend would close that hole - alongside myriad other socioeconomic benefits.

[jasonboyd]

I am not an expert in this field by any means but, Planet Money did a piece recently that suggested some people are putting forward a serious theory for how a profit-price spiral would work. Again, not an expert, but the reasoning ng seemed sound. Link here:

https://www.npr.org/2023/05/11/1175487806/corporate-profit-p...

[littlestymaar]

> This is a measure of where inflation "goes", not what fuels inflation. The narrative that profits are "fueling" inflation is completely made up and the people pushing it are lying to everyone for political reasons.

Inflation is caused by rising prices. In the b2c markets, the prices at set by the companies. It is believed that in presence of sufficient competition, the companies aren't really free to set the price, and are only following the “market price” (they are said to be “price-takers”).

Here we see profit rising, which means that the competition isn't high enough, companies have become “price setters”, and they are setting the rising price. Hence they and their profits are responsible for inflation. QED.

[Fervicus]

> governments that overstimulated their economies

I don't understand the nuances of global economics, but makes you think how and why so many governments made the same monetary policy mistakes in lockstep.

[diordiderot]

In software the phenomenon is called best practices.

Think of Chicago School and MIT economists as Meta and Amazon leads.

In finance they say, 'no one ever got fired for buying IBM'

[Fervicus]

Interesting point. I could agree with this analogy if different countries had "bought IBM" at different times and thus made the same mistake. But what has happened here is that many countries have bought IBM together at the same time.

[otherme123]

Any book about history of inflation shows the same pattern repeated over and over again, for the last 10,000 years: the government debases the money, e.g. the one ounce pure gold coin now is half gold half copper. They start to pay with those coins, at first at the same prices, but with the new demand rising prices go up. The government always try to put the blame on the greedy merchants, and always try to put price caps, to pass laws forbidding price rises, etc.

The dynamic of inflation makes this narrative plausible: when the government spends their new debased money, the first to get them are their providers, and their volume rises. As with every demand spike, prices go up, but the closer you are to the money printing, the best deal you get being able to spend new debased money as it was the old money. Wages are usually the last to get the rise, so the worker see how the bussiness raise their prices "greedily" while they don't get wage raises.

[imtringued]

Precious metal coins is a concept that the ancient Greeks introduced and the Romans spread across their empire.

Ancient Egyptians didn't use precious metals. They used something far more mundane. You are a farmer? You bring your harvest of corn to a storage house and receive a receipt of your deposit on a clay tablet.

But here is the thing. Storing grains is expensive and they don't last forever, so the depositors are charged the cost of storage if they keep their receipts for longer than a year.

Now imagine you do the same thing except your receipt is gold. The concept of an eternally lasting receipt should raise an eyebrow. Who is going to pay for the storage costs? If nobody, then congratulations you just invented a Ponzi scheme! Early depositors get bailed out by future depositors!

Alternatively, the value of the coins must shrink to accommodate the loss of grains, but here is the thing. You are in a deflationary boom, you don't care about reality. But at some point you will try to spend your deflated money, right? Well, you will come crashing down to reality. The sudden price adjustment towards reality will cause a lot of inflation all at once.

Ok, so now that we know the dynamics of precious metal money even in the absence of government intervention, aka cycles of booms and busts.

We can now think about the motivation of the Roman Empire which is the most famous historic example of "debasement" because they were the first ones to do it on a large scale. Well, you see, the Roman empire was constantly expanding its borders to acquire new precious metal mines. This works until you run out of mines. In other words, it was a pyramid scheme that needs a constantly expanding territory.

So instead of thinking as precious metal money to be something aspirational, it would be smarter to realize that it doesn't work. I mean the easiest way to prove the idiocy of a gold standard is to point at all the fiat currencies that originated from a failed gold standard, which is basically all of them. In other words, fiat currencies aren't some kind of perversion of money, they are the late stage of a failed precious metal currency! It is easy to see why. Precious metal currencies don't circulate fast enough to clear the market because of their deflationary tendencies aka hoarding. So banks create a money substitute that is as good as the real thing but the problem is that the substitute can be hoarded as well so the problem can never be solved other than by substituting existing money with even more of the same hoardable money. In other words, the money supply has to rise all the time to accommodate uncoordinated/speculative saving decisions that have not been properly communicated to the market.

What I think is either sad or amusing, is that people think that these dynamics can somehow be avoided just by the government being tough enough on the economy to make all forms of money substitutes illegal, as if that wasn't some kind of massively disruptive government intervention.

Now let's go back to Ancient Egypt. If people hoarded the grain money, then the same dynamic would apply to that money right? The grain banks would have to create fake deposits for grains that don't exist and there would be constant runs on the banks, right? Except there is no historical evidence that this ever happened because people didn't want to pay the storage fee. Isn't it strange that this ancient civilization never recovered, even after thousands of years of Roman currency? Maybe the whole idea was a scam from the start. Permanence in our world is a meaningless concept. Your gold money will remain on earth billions of years after humanity has gone extinct, how exactly is it supposed to maintain its value?

[otherme123]

I love how one can make an example (gold coin) to illustrate an issue (debasement) to receive a long lesson about the example being incorrect instead of discussing the issue. I never said "gold is the solution", and in fact my example is about how governments historically debased gold coins.

An egyptian government can also "debase" grain. Just issue fake receipts for unexistent grain, and buy things with them at current prices. Suddenly, there are a lot of grain receipts circulating, so you expect prices to rise. The government can now blame the price rise to the merchants! They are the ones that are rising the prices, and that's all you can see.

On the example of the grain deflation, you don't have a "receipt in gold". You buy or sell grain, and that's it. Lets suppose a simple market that stores grain at a cost of 10% in a year. You sell grain on January for 100 ounces of gold, but if you try to re-buy the same amount of grain in December, it costs 110 ounces, or receive a 10% less grain for 100 ounces. As simple as that. Your 100 ounces of January didn't guarantee you the same amount of grain in December, because they are not a "receipt in gold for X amount of grain". Prices are a dynamic way of economic coordination to reflect whatever reality it may come. E.g. if half the silos burn through the year, grain prices will double to reflect that, and that's not inflation. But good luck reclaiming your clay receipt amount of grain.

The problem here is not the gold. The problem is issuing more money than people are demanding. There is nothing wrong with issuing money (e.g. in form of new credit) if people demands credit that they are paying sooner or later. The problem is the government creating new money with zero intention of paying it back, because that fuels inflation.

Deflation is not bad _per se_. We have deflation in computer or mobiles prices since forever: we know we can buy a cheaper computer in the future with the same specs than today, yet we don't hoard money instead of buying computers. We buy them when we really need them. Inflation creates an artificial urge to spend sooner than you want/need, because we know our today money won't buy the same in the future but less. That looks like a good thing on the surface ("the economy moves" they say), but it has a lot of bad consequences: erodes savings, consumption rises above our real needs, investment is more difficult because economic calculations are uncertain.

Historic inflations are well explained here: https://www.amazon.com/Forty-Centuries-Wage-Price-Controls/d..., where the authors collect a large number of inflation events in the last 4,000 years and show how every single government followed the same route: 1) debase the money, 2) expend their newly created money, 3) prices raise, 4) people complain, 5) government blames the merchants and creates laws to control prices and punish price raises 6) inflation persists.

[mo_42]

> The problem here is not the gold. The problem is issuing more money than people are demanding. There is nothing wrong with issuing money (e.g. in form of new credit) if people demands credit that they are paying sooner or later. The problem is the government creating new money with zero intention of paying it back, because that fuels inflation.

I don’t see the problem here. Does the government have any intention of paying it back? What would happen if all created money was payed back?

Seems more like created money/governmental debt needs to stay so people have something in their pockets to actually pay for something.