Is the claim of this article, “Half of recent US inflation due to high corporate profits” legitimate?

ill repost my previous answer on this, with some new stuff

i think there are a couple sets of studies that all claim to be about “greedflation” but which make very different economic arguments. Unfortunately, economic news coverage tends to treat them the same.

The first set of studies, which are the most common that people encounter, are “accountings” of inflation. You’ll see something like “corporate profits accounted for 30% of increases in prices”. These are studies of who benefited from inflation not what caused inflation. This is also the study that the Guardian is linking to does.

To see why these accounting measures are not helpful, think about the market for used cars circa 2022. The chip shortage caused a huge drop in the production of new cars which spiked demand and limited supply for used cars. This caused the price of used cars to spike and used car profits to go way up. Used car profits account for a large percent of the price increase even though the cause is clearly a chip shortage. You would also get this exact result if the underlying inflation was caused by too much demand and an overheated economy, which is why the accounting measure is not much use.

The second sets of studies are usually trying to figure out whether specific economic circumstances make it easier/harder for firms to exert market power. Some examples would be that periods of high inflation make it easier for firms to collude or that prices are somewhat pinned down by social norms about what “acceptable” prices are, which periods of high inflation can break. These are causal claims about price setting and not accountings of who benefited. These are also much more challenging papers to write because, no, there isn’t a one-size-fits-all approach to this. To estimate something like “how much did increases in market power stemming from cost uncertainty increase inflation?” an economist would need to write down a model of how this price setting behavior works, try to find some place where it’s very clear this behavior is what’s happening, and then try to scale up this result to the broader economy, if they wanted to say something like “changes in market structure contributed X% to inflation”. That’s pretty challenging to do.

A recent paper looked at all of these directly:

>A popular narrative has attributed the post-COVID rise in inflation to a rise in corporate profits. The literature in industrial organization offers three reasons for price increases: greater demand, greater marginal costs, and softening of competition (conduct). I argue that only sensible interpretation of the “Profits-Inflation” hypothesis is that a change in firm conduct was the primary cause of inflation. However, I also find that most of the evidence cited in favor of the “Profits-Inflation” hypothesis, such as elevated profit margins or capital share of income, is unable to distinguish between increased demand and a change in the nature of competition.

– https://www.sciencedirect.com/science/article/pii/S016771872600010X

Matt bruenig and Joseph Politano had pretty readable overviews of some of the commonly cited studies and arguments (linked below).

– https://mattbruenig.com/2023/05/04/more-on-inflation-and-profits/
– https://mattbruenig.com/2023/06/27/why-did-used-car-prices-go-up-so-much/
– https://www.apricitas.io/p/are-rising-corporate-profit-margins