The good people over at the Center for American Progress (CAP) are calling bullshit on the Wall Street-inspired myth that high worker wages are the main cause of inflation, and that the only way to tame inflation is through Fed rate hikes and higher unemployment.
Historically, countering inflation has been left to the remit of the interest rate policy of the Federal Reserve. In recent months, the Federal Reserve has been sharply increasing interest rates in an attempt to reduce demand, slow the economy, increase unemployment, and lower inflation. This risks sending the country into a recession. While low-income households often feel inflation the hardest, a Federal Reserve-induced recession would be far worse, as millions of the most economically vulnerable Americans could lose their incomes entirely.
Alternative methods exist to fight inflation and reduce the costs of essentials over the longer term that would not adversely affect low- and middle-income households. Congress and the Biden administration have pursued some of these alternatives, including through the newly passed Inflation Reduction Act. These measures reduce inflationary pressures by investing in domestic production, boosting the United States’ productive capacity, tackling long-standing issues of corporate concentration, and more. These efforts have been underway for some time now and have already helped ease inflationary pressures. They should also help the economy better absorb some future demand and supply shocks so that it is more robust overall.
CAP points out an economic question that much of the mainstream press seems unable to understand clearly: if worker wages are at the heart of corporate America’s inflation-causing price increases, why are corporate profits at an all-time high?
From 1979 to 2019, inflation-adjusted wages for the bottom 10 percent of households rose by just 6.5 percent; the median household saw growth of just 8.8 percent over those 40 years, while the 90th percentile of earners saw a whopping 41.3 percent growth.
Meanwhile, data from the AFL-CIO show that profits of S&P 500 companies rose by 17.6 percent in 2021—and the earnings of their CEOs grew by 18.2 percent. That’s more than twice as fast as inflation that year and almost four times as fast as nominal wage growth for regular workers. There is no evidence that typical worker wages are eating into profits either, as profit margins reached 15.5 percent in the second quarter of 2022 for nonfinancial companies, the highest they have been since 1950. (see Figure 2)
Companies could be using their profits to expand their productive capacity for the future and ease the supply constraints that have contributed significantly to inflation. They could also be using their profits to reinvest in their workforces by paying workers better. As Walmart and many other brands have recently discovered, even slightly higher wages result in lower worker turnover and higher productivity, which ultimately boost overall economic growth. Instead, however, many corporate executives have chosen to enrich themselves.
Some business executives have admitted on shareholder calls and in surveys that they have been taking advantage of inflation to boost profits by increasing prices beyond what is needed to offset any increase in their input costs.
You can read the rest at this link.