Inflation has become the major concern in the US and the EU, and most monetary policy actions are now geared to tame it. In fact, for the past several years coinciding with the start of the Covid-19 pandemic and the ensuing economic aftershocks, much of the world has been rattled by inflation including developing countries such as Bangladesh.
The sharp increase in inflation blindsided many economists; almost no one saw it coming. Economists and commentators alike have gone to a great length to discuss what exactly is causing price rise that is eroding away the purchasing power of ordinary working people. Inflation is rising at levels higher than we have seen in decades.
It is generally assumed that for reasons largely related to spending practices and other related factors of the pandemic as well as supply side shocks generated by the Russia-Ukraine conflict, inflation has seen such rise. That is the argument also advanced by public officials in Bangladesh and many other developing countries.
The expectation is that this surge in inflation is a temporary phenomenon and will normalise by the end of this year. The US Federal Reserve has put a temporary hold on further interest rates rise as the inflation outcome appears to be on a downward trend, but will not hesitate to push up interest rates if that is not the case.
Inflation has far-reaching consequences for workers impacting on wage negotiation, employment opportunities, and raises the cost of living for all. The surge in inflation in the post Covid-19 period with the prospect of recession implies stronger transmission shocks. When inflation is rising, it generates conditions appropriate for further price rises, thus increasing inflation risk.
The issues surrounding inflation have always been and going to be more complex. In this regard, most public policy framers curiously show a distinct lack of imagination in their reading of inflation showing a continued fixation with wages and labour costs, not with other sectors of the economy such as corporate profits. They argue that labour getting a more advantageous bargaining position since the covid-19 pandemic is a major cause of inflation.
US Federal Reserve Chair Jerome Powell admitted that his goal is to "get wages down". Former US Treasury Secretary Larry Summers called for five years at 6 per cent unemployment or a year at 10 per cent unemployment in order to bring down inflation. But real wages have declined causing declining standards of living to most people in the US and many developed countries.
There is now a growing debate as to whether some corporations, or some industry sectors have used the Russia-Ukraine conflict and easing of Covid-19 restrictions to drive up profits and add to global inflation pressures. In early June this year, the president of the ECB, Christine Lagarde conceded to a parliamentary committee that there appeared to be cases of increased corporate profits causing the EU's inflation problems worse.
Isabella Weber, an Economics Professor at the University of Massachusetts in a column published in the Guardian in December 2021 argued for 'strategic price control' as was done during the WWII. She clearly attributed the rising inflation to "large corporations with market power" and then went on to say that they "have used supply problems as an opportunity to increase prices and scoop windfall profits".
Ross Garnaut, an eminent Australia academic economist and a former Australian Ambassador to China in a very recent public lecture on "the economic public interest in a world of oligopoly" pointed out that in such a situation the economy does not operate according to the "free market" or "competition" but is dominated by a handful of powerful corporations. Monopolists make their money not through productive activity but by extracting economic rents. "Most importantly", he further added, "there has been a large increase in the rent component of total income (in Australia)".
In the context of Australia, a recently published OECD report also raised the issue and expressed the view that it may be a lack of competition that is enabling businesses to pass on costs with relative impunity. The report then adds, "A key policy issue is whether the observed aggregate increase in unit profits reflects a generalised lack of competitive pressures throughout the economy, or specific factors that have contributed to strong profit growth in a few sectors or in a subset of firms".
Furthermore, a study undertaken by the Australia Institute has also found that much of Australia's inflation surge over the past years has been driven by higher-usual-profits, especially in the resources sector. This research findings were criticised by the Reserve Bank of Australia (Australia's central bank), and business leaders complained that they have been unfairly targeted for embracing the profit motive.
Former US Labour Secretary Robert Reich has consistently argued that "it is greedflation" which Weber describes as "seller's inflation". In fact, the Biden administration has acknowledged monopolies as a major risk for supply chains. Large corporations can raise prices simply because they can. Researchers at the Federal Reserve Bank of Kansas City in the US recently estimated that more than half of the inflation seen in 2021 was due to rising profit margins.
Workers are getting a record low share of national income while company profits surge in the post Covid-19 period. Those who are aware of the situation where corporate profits have been skyrocketing since the pandemic have canvassed for more guardrails on profiteering and active intervention by the state. The post-Covid inflation period has been characterised by a decline in real wages, labour share of GDP and record corporate profits thus clearly indicating a profit-price dynamic or what some economists call it "seller's inflation" But as usual, many mainstream economists and media commentators have dismissed this as a baseless conspiracy theory.
The latest Economic Outlook published early in June this year by the OECD reported that unit profits made up a greater share of price increase than the unit labour costs during the pandemic. The report further adds that the employee share of national income remains near-historical lows with profit share near-high. Overall businesses have been the big beneficiaries of inflation so far.
Another report published by the IMF (June 26) clearly expressed the view that corporate profits have been the biggest contributor to inflation in Europe since 2021. The IMF report made the point that "rising corporate profits were the largest contributor to Europe's inflation over the past two years as companies increased prices by more than the spiking costs of imported energy".
But there are other problems that need serious attention at this point in time ranging from cost of living crisis, deglobalisation, aging population, climate change to many other related issues including tighter global financial costs that could worsen debt distress of many developing countries. There is now great a likelihood of recession this year led by declining consumer spendings, investment in residential and commercial buildings and an inventory drawdown.
While inflationary pressures are forecast to continue to ease in subsequent quarters in 2023 in developed countries, it is unlikely to happen in developing countries like Bangladesh. This is because of high exchange rate of the US dollar, falling foreign exchange reserves and delayed pass through of higher food and energy (of which Bangladesh is a net importer) prices to the rising price pressures. According to the IMF, global food crisis may persist with prices still elevated.
The current spate of inflation in Bangladesh has largely been attributed to costs transmitted by disrupted supply chains enabling large importers and domestic businesses to jack up prices far more than the transmitted increased costs notwithstanding the hoarding by domestic business syndicates adding to further supply disruptions.
The existence business syndicates (cartels) in Bangladesh clearly points to the lack of competition enabling large firms to exercise their market power to increase prices. Bangladesh responded by culling imports of non-essentials and through fiscal austerity. The former would only further add to the inflation problem by further restricting supply given that essentials and non-essential consumer good are a matter of value judgement, and the latter has always proved to be a hard nut to crack.
This clearly shows Bangladesh's vulnerability to external market shocks but more importantly, taking advantage of these shocks excessive price increases by cartelised businesses in Bangladesh significantly contributed to increased profit margins, thus fuelling inflation. In fact, a very large portion of increased profits earned by Bangladeshi firms is economic rent. This is symptomatic of the economy where competition is arguably not as strong as it should be.
However, the study undertaken by the IMF published on June 26 (mentioned earlier) further added, "the results show that firms have passed on more than the nominal cost shocks, and have fared relatively better than workers". Also, the share of inflation caused by import prices reached its peak in mid 2022 and has since been falling. This clearly indicates that supply chain disruptions caused by the Covid-19 pandemic have largely been solved, yet businesses continue to hike prices anyway.
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