Sellers' Inflation and Distributive Conflict: Lessons from the Post-COVID Recovery

ABSTRACT

The paper offers a post-Keynesian explanation of the soaring inflation experienced during the post-COVID recovery, coherent both at the microeconomic and macroeconomic levels. The microeconomic argument is rooted on the premise that price-making firms consider both their costs and their desired share of profits when setting prices. To defend profit margins in the aftermath of the pandemic, the initial cost-push shock was passed to consumers through higher prices; in a second phase, some firms, particularly in more highly concentrated and systemically significant sectors, benefited from the post-pandemic permissive pricing environment to increase their price mark-ups, leading to temporary profit-fueled inflation following the cost-push shock. This microeconomic explanation is compatible with the macroeconomic notion of a stable inflation barrier. For a given quantity of real output, it is shown that if profit earners defend their share of income following a cost-push, this will produce a one-time price increase, with inflation becoming more persistent if the target adapts endogenously — i.e., if the aggregate mark-up changes. The paper contrasts the notion of a wage-price spiral with that of a profit-price sink, arguing that sellers' inflation is a real — albeit temporary phenomenon.

KEYWORDS:

• Conflict inflation
• mark-up
• income distribution
• profit margins
• profit-price sink

JEL CODES:

• D40
• E12
• E31
• E64

Acknowledgements

We are most grateful to Maria Cristina Barbieri Góes, Marc Lavoie, Achilleas Mantes, Franklin Serrano, Antonella Stirati, Isabella Weber, and two anonymous referees for their helpful comments and fruitful discussion. We would also like to thank the participants of the STOREP 2023 Conference (Bari, June 15-17, 2023), the 4th International Workshop on Demand-led Growth: “Money and Finance” (Rio de Janeiro, July 26-27, 2023), and the Workshop on Monetary Policy and Income Distribution at the Fields Institute (Toronto, November 16 - 17, 2023). All remaining errors are, of course, our own.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 https://www.theguardian.com/business/2022/feb/04/bank-of-england-boss-calls-for-wage-restraint-to-help-control-inflation

2 This evidence will be modelled in Sections Three and Four.

3 https://www.ecb.europa.eu/press/key/date/2023/html/ecb.sp230627b8694e47c8.en.html.

4 https://www.cbc.ca/news/business/inflation-profit-analysis-1.6909878.

5 https://twitter.com/ojblanchard1/status/1608967176232525824.

6 In order to make the analysis as tractable as possible, we abstain from the consideration of intra- and inter-sectoral relations. Rather, we merely deal with the pricing behavior of a single firm, without modeling the feedback it has on other firms' cost and pricing structures. As we shall see in the remainder of the paper, the rationale for this choice — beyond its easier tractability — lies in the idea that price changes for few firms in a handful of key sectors produced cascade price increases in the overall economy and thus an increase in the general price level (Weber and Wasner 2023).

7 It is worth stressing that there might be a fourth channel, i.e., a cost-push through wage increases ($w_j$). While it is undeniable that some sectors (mostly services) in the US experienced a significant increase in wages, it is unlikely that such sectors might have been significant for aggregate inflation (Bivens 2022; Weber et al. 2022; Weber and Wasner 2023). For this reason, we abstain from considerations of changes in the sectoral nominal wage by assuming it constant. Similarly, we abstain from other two potential channels which could play a role in the longer run, i.e., changes in labor productivity (affecting $a_i$) and in intermediate costs structures (e.g., improvements in energy efficiency, affecting ${\mu }_i$).

8 Unlike its mainstream counterparts, the post-Keynesian cost-plus pricing procedure presented here only allows for a one-time effect of expectations on prices, on the basis of the idea that the inability to predict market outcomes result in inventory rather than price changes (Gallo and Serra 2024).

9 This is the line of argument put forward (Lavoie 2023c). The idea that profit shares can increase even though markups remain constant has also been recently discussed — using Cobb-Douglas and CES production functions — by Colonna, Torrini, and Viviano (2023).

10 For further discussion, see Hein (2014, 2023b).

11 For the sake of the argument, henceforth we assume that aggregate income is evenly split between wages and profits, i.e., both the wage and profit shares are 50 percentage at time t = 0. For further discussion, see Appendix .

12 For the relation between market power and mark-ups before the pandemic, see De Loecker, Eeckhout, and Unger (2020).

13 For empirical evidence of mark-up inflation after 2021, see Matamoros (2023).

14 In this sense, it should be noted that the maximum profit share achievable at $m_{j,max}$ also corresponds to the maximum rate of profit, in line with Weisskopf's 1979 decomposition of the profit rate, i.e., $r=\mathrm{\pi u}/v$. More specifically, given that we are abstaining from the analysis of quantity adjustments ($\mathrm{\Delta }u=0$) and under the conventional assumption of constant capital-capacity ratio, a change in the mark-up that raises the profit share will translate in a variation of the rate of profit equal to $\mathrm{\Delta }r=\frac{u}{v}\mathrm{\Delta \pi }$.

15 See for instance, the discussion in Hein (2014, pp. 128-129).

16 It is worth noting that equation 8(8) ${\mathrm{\Pi }}_t=\frac{{\pi }_T}{1-{\pi }_T}{W}_t$(8) implies that the ratio between the target profit and wage shares set by profit earners must be equal to the ratio of actual factor shares, i.e., $\frac{{\pi }_T}{1-{\pi }_T}=\frac{{\mathrm{\Pi }}_t/Y_t}{W_t/Y_t}=\frac{{\pi }_t}{1-{\pi }_t}$.

17 Intuitively, given that profits are by definition smaller than aggregate output, a positive cost-push shock will always produce an increase in the target. This could be shown formally as well. Given that $Y_0=W_0+{\mathrm{\Pi }}_0$, it could be readily show that $d{\pi }_T/\mathrm{dϵ}=W_0/(W_0+{\mathrm{\Pi }}_0+ϵ{)}^2>0$.

18 This situation is similar to the first case discussed at the microeconomic level, in which the individual firm raises prices as a consequence of a cost-push shock caused by the increase in the price of energy, raw materials, and intermediate products.

19 It is important to note that this scenario corresponds to one in which the aggregate mark-up increases, driven by the mark-ups of firms in strategically significant sectors. The empirical evidence that the aggregate mark-up has indeed increased in the US is not conclusive; the magnitude of the increase is still unclear, with some authors arguing that, despite sectoral shifts, the aggregate mark-up has remained roughly constant (Davis 2023).

20 We avoid providing a specific functional form for the sake of generality. However, it is important to note that doing that would require weighting either the profit share or mark-up of systemically significant firms to account for their relative importance in the macroeconomy. For the sake of simplicity, in the simulation shown in Figure 7 we merely assume that ${\pi }_T$ follows the same sigmoid behavior observed for ith firm.

21 For more in-depth empirical analyses, see Deleidi and Levrero (2020) and Barbieri Góes (2023).

22 See data: Price per unit of real gross value added of nonfinancial corporate business, Quarterly, Seasonally Adjusted, A455RD3Q052SBEA, https://fred.stlouisfed.org/series/A455RD3Q052SBEA [Accessed October 1st, 2023].

23 See data: share of corporate-sector income received by workers over recent business cycles, 1979–2023, https://www.epi.org/nominal-wage-tracker/ [Accessed October 1st, 2023].