The less discussed causes of Inflation.
On Thursday, Feb. 10, 2022, inflation numbers for January were released by the U.S. Bureau of Labor Statistics and they were to put it mildly not great. Twelve-month un-adjusted inflation rate for all items was 7.5%. In energy alone inflation was at 27% for the year, with fuel oil at a mindboggling 46.5% for the last 12 months. Plainly this is bad for several reasons, paramount is the impact to real wages, which only grew by .1% however when you look at production and non-supervisory role real wages declined by 1.7%. For most Americans this is detrimental, as essential items like fuel and food see month to month inflation that eats up increasingly of their income.
After these numbers came out, there was a particular villain that most in media were quick to blame, The Government and specifically the Biden Administration. The central claim is that the $4.6 trillion (about $14,000 per person in the US) in Covid Relief along with the $550 billion (about $1,700 per person in the US) in new spending that the Infrastructure Investment and Jobs Act authorized in November, are the primary causes of inflation because these appropriations put too much money into the hands of consumers. Looking at data from the U.S. Bureau of Economic Analysis from the consumer spending has surpassed pre-pandemic levels. Throughout the pandemic the savings rate had a mean of 14% in any given month, with a high of 33.8% after the first stimulus payments. So, on paper it would seem that government spending had a strong impact on driving inflation, that is until you look at the supply chain, and the behavior of corporations.
On the supply chain / supply side is obvious what is happened. The organizational structure of global inventory management imploded. This system was based on just in time delivery, meaning that the system relies on all materials arriving just before the user runs out. Once the pandemic arrived this became increasingly difficult as slowdowns and work stoppages, reduced output capacity, and logistical capacity, in such a manner that the system began to break down at all weak points. Looking just at semiconductors’ production – almost 60% of global manufacturing is in Taiwan with one company in Taiwan accounting for over 50% of global production output. This monopoly on production means that any change to their output would reduce global supply in a significant fashion. So, when they did have production issues almost every sector reliant on semi-conductors had their production capacity reduced.
One only has to look to the Launch of the PS5, Xbox Series X/S, and Nvidia RTX 3000’s Graphics cards to see the impact of the chip shortage or look to any new car lot and see the complete lack of inventory because the auto manufactures cannot get the chips to complete the new cars. This reduction in global supply for most consumer goods, has led to prices skyrocketing as individuals have started hording in demand items and reselling them for 200-300% mark ups. Leading to inflation, shortages of other items like used cars causing more inflation.
On the behavior of corporations, we have seen in full force the impact of monopolization. In every sector where there is a monopoly or oligopoly (where a small group of companies control the vast majority of the market) we are seeing price increase after price increase. Even as all of these major companies are turning out record profits. For example, in the meat packing industry where four major companies control 85% of meat packing finished product has skyrocketed in price. The Bureau of Labor Statistics reports meat inflation around 20% compared to 2020. However, Tyson Foods one of the big four meat packers records double digit increases in profits and a 40% increase in operating revenue. This is because Tysons’s input price has not increased by the same amount. According to the United States Department of Agriculture, the gross farm value of a head of cattle has only increased by $31 in the last 12 months or an 11% increase. The retail cost has increased by over $100 or a 10% increase in price. Where the real driver of meat is in the wholesale cost which increased by $61 or a 17% increase. Because the middle industry of the entire meat production process is an oligopoly, the ability of farmers and retailers to negotiate a price cut is almost impossible. Oligopolies force farmers to sell as close to a loss as possible and continue to raise the wholesale price leading to an increase in retail prices. This phenomenon is not isolated to the meat packing industry its pervasive throughout almost every sector according to Fortune Magazine “Fortune 500 companies represent two-thirds of the U.S. GDP with $13.7 trillion in revenues, $1.1 trillion in profits, $22.6 trillion in market value,”. Adding to the supply crisis, companies have found ways to raise prices even if they do not face inflationary pressures. They can do this because no firm is operating at full capacity. Capacity utilization has declined since 2018, from around 80% to 76 percent in December 2021, this is still above the pandemic low of 63%, the mean over the last year and a half has been 74.5%. With firms reducing capacity utilization the amount of goods available for purchase is reduced, leading to shortages and inflation, as demand outstrips supply.
For the average American, the inflation we are seeing presently is incredibly damaging to the
least well off in our society. Those who oppose government intervention use the inflationary pressures to further their political ends same with those who say the current inflation is transitory and that it will sort itself out once the supply chain is fixed. Both views miss a larger point about structures and systems. Basic principles of microeconomics dictates that the relationship between supply and demand determines price. What the last two years have shown us is that we have a very fragile supply system, which relies on the assumption that everything will arrive on time and that we will have just enough produced to meet demand. We also operate in an economy where oligopolies dominate most markets and as such can break microeconomics because the market is not perfectly competitive. Thus, the ability of U.S. consumers to easily find substitute goods that have more value or are cheaper becomes infinitely difficult.
Tyler Dunn
Mount Vernon
Referenced material
https://www.marketplace.org/2022/02/10/meat-prices-have-been-rising-with-inflation-but-whosbenefiting/
https://www.statista.com/statistics/266143/global-market-share-of-leading-semiconductor-vendors/
https://www.usaspending.gov/disaster/covid-19?publicLaw=all
https://www.bls.gov/news.release/realer.nr0.htm
https://www.bls.gov/news.release/cpi.nr0.htm
https://tradingeconomics.com/united-states/personal-savings
https://tradingeconomics.com/united-states/consumer-spending
https://tradingeconomics.com/united-states/inflation-cpi
https://tradingeconomics.com/united-states/capacity-utilization
https://www.ers.usda.gov/data-products/meat-price-spreads/
