How Monopoly Power Amplifies Inflation

EDITOR'S NOTE:

A recent Boston Federal Reserve paper found that concentrated industries tend to “amplify” inflation more so than industries with greater numbers of corporate competitors.  

But what is it not telling you? According to the article below, there’s hardly any mention of the Fed’s role in driving up inflation. In other words, the report doesn’t seem to indicate that inflation is a monetary problem and not just a problem of supply or, as the paper highlights, a monopoly-like environment. It reads like a diversion.

And why’s this important? If you buy into the Fed’s reporting, then you’ll never get to the real crux of the issue at hand because the data you need to do a thorough evaluation of current inflation is largely absent. You’ll end up buying the narrative of “monopoly inflation” rather than “monetary inflation.”

High levels of corporate concentration — where just a few companies make up an entire industry — contribute to inflation, finds a new paper from economists at the Federal Reserve Bank of Boston, Emily writes.

Why it matters: There's currently a raging debate over what exactly is causing record inflation in the U.S. This paper, coming from a less partisan source than, say, the White House, boosts the arguments of Democratic lawmakers and progressive economists who say companies are taking advantage of this moment to push prices up.

Details: The paper's authors looked at company data from 2005 to 2018 in 35 industries to see how businesses of varying sizes within sectors reacted to "positive cost shocks" (when the price to make stuff goes up).

• In more concentrated industries, companies passed 25 percentage points more of those costs on to consumers.
• The paper's estimates are "conservative," the authors write, because concentration increased sharply after 2018.
• The U.S. economy is at least 50% more concentrated today than in 2005, they write.

Crucial: The authors are not arguing that monopoly power causes inflation, but that it's "an amplifying factor" that allows companies to pass on more of the costs of "supply shortages, energy price shocks, and labor market tightness."

The other side: Many economists — notably Larry Summers — argue that inflation has more to do with supply chains, record pandemic-driven demand and increasing wages for workers.

What to watch: A more detailed version of this Boston Fed paper is forthcoming.

Go deeper.

Originally published by Axios.