[acslater00]

Fake news.

This is a measure of where inflation "goes", not what fuels inflation. The narrative that profits are "fueling" inflation is completely made up and the people pushing it are lying to everyone for political reasons.

Inflation is caused - in most countries - by excessively loose monetary policy (sometimes fiscal policy, sometimes both). If government policy creates inflation (average prices go up) that money can flow to a domestic labor or domestic investors or leave the country. This depends on supply-side factors that are basically orthogonal to the inflation question. It is true that in the most recent round of inflation it primarily led to increased corporate profits.

There is a theory from the 80s called the wage-price spiral [Blanchard] that talks about how inflation (which is initially caused by fiscal or monetary policy) can become self-sustaining if wages and prices are set in a staggered back-and-forth kind of way, as workers react to higher prices by demanding raises, and firms react to higher labor costs by raising prices. However, there is no serious theory that such a process would happen with profits. That makes no sense at all! The exact opposite would be true, if anything. High profits in some time period would likely regress to the mean as price competition sets in. In fact, this is exactly what is happening right now, as corporate profits after spiking over the past 12 months are shrinking.

The "profit-price spiral" narrative is being pushed by the same disingenous idiots pushing the "greedflation" narrative - it is not a serious attempt to explain inflation, it is an attempt to use reasonable-sounding economics words to blame inflation on companies instead of the actual culprit: governments that overstimulated their economies to such a degree that they caused both inflation and profits to spike.

[dools]

> This is a measure of where inflation "goes", not what fuels inflation. The narrative that profits are "fueling" inflation is completely made up and the people pushing it are lying to everyone for political reasons.

Inflation is an increase in price level. When prices go up, one might consider that the price of inputs has gone up, or that profits has gone up, or both.

If the inputs go up, and the price stays the same, profits would go down, and there would be no change in price level. If companies are unable to be profitable in the face of rising inputs, they will collapse.

If inputs go up, and profits stay the same, prices would increase in line with the increase in inputs, ie. an increase in price level, ie. inflation.

If inputs go up, and profits increase, then prices will increase more than the cost of inputs would dictate, ie. inflation.

You can't say that the price increase in things like fuel and food were the result of profligate government spending, because that would suggest people are taking money they received from the government as covid stimulus and increasing their consumption of food and fuel.

You can't say that price levels have increased because of increased labour costs, because real wages have declined.

You can't say that companies have increased prices only sufficiently to offset the increase in inputs, because then profits would not have increased.

What you can say, though, is that the cost of inputs went up, there was a fiscal stimulus due to covid, people had increased spending power, and companies that sell "must haves" increased their prices to absorb that increased spending power, over and above what was required to satisfy increased input costs.

Then, because price levels went up (due to increased profits absorbing additional spending power) governments increased interest rates, making things more expensive for the very people whose increased spending power had just been absorbed by said companies.

[dageshi]

If a company has for sake of argument a 10% profit margin on an item and seeks to maintain that 10% profit margin after an increase in its input costs then is that unreasonable?

In dollar terms its profits have gone up but as a percentage they haven't.

[pcthrowaway]

Who had increased spending power exactly? I was under the impression the stimulus was mainly directed towards people who had suffered wage loss due to covid.

[diordiderot]

> price competition sets in

You going to start an airline, a Telco, or meat processing plant because the others are colluding

[AuryGlenz]

So, literally everyone is colluding then?

[jasonboyd]

I am not an expert in this field by any means but, Planet Money did a piece recently that suggested some people are putting forward a serious theory for how a profit-price spiral would work. Again, not an expert, but the reasoning ng seemed sound. Link here:

https://www.npr.org/2023/05/11/1175487806/corporate-profit-p...

[littlestymaar]

> This is a measure of where inflation "goes", not what fuels inflation. The narrative that profits are "fueling" inflation is completely made up and the people pushing it are lying to everyone for political reasons.

Inflation is caused by rising prices. In the b2c markets, the prices at set by the companies. It is believed that in presence of sufficient competition, the companies aren't really free to set the price, and are only following the “market price” (they are said to be “price-takers”).

Here we see profit rising, which means that the competition isn't high enough, companies have become “price setters”, and they are setting the rising price. Hence they and their profits are responsible for inflation. QED.

[Fervicus]

> governments that overstimulated their economies

I don't understand the nuances of global economics, but makes you think how and why so many governments made the same monetary policy mistakes in lockstep.

[diordiderot]

In software the phenomenon is called best practices.

Think of Chicago School and MIT economists as Meta and Amazon leads.

In finance they say, 'no one ever got fired for buying IBM'

[otherme123]

Any book about history of inflation shows the same pattern repeated over and over again, for the last 10,000 years: the government debases the money, e.g. the one ounce pure gold coin now is half gold half copper. They start to pay with those coins, at first at the same prices, but with the new demand rising prices go up. The government always try to put the blame on the greedy merchants, and always try to put price caps, to pass laws forbidding price rises, etc.

The dynamic of inflation makes this narrative plausible: when the government spends their new debased money, the first to get them are their providers, and their volume rises. As with every demand spike, prices go up, but the closer you are to the money printing, the best deal you get being able to spend new debased money as it was the old money. Wages are usually the last to get the rise, so the worker see how the bussiness raise their prices "greedily" while they don't get wage raises.

[imtringued]

Precious metal coins is a concept that the ancient Greeks introduced and the Romans spread across their empire.

Ancient Egyptians didn't use precious metals. They used something far more mundane. You are a farmer? You bring your harvest of corn to a storage house and receive a receipt of your deposit on a clay tablet.

But here is the thing. Storing grains is expensive and they don't last forever, so the depositors are charged the cost of storage if they keep their receipts for longer than a year.

Now imagine you do the same thing except your receipt is gold. The concept of an eternally lasting receipt should raise an eyebrow. Who is going to pay for the storage costs? If nobody, then congratulations you just invented a Ponzi scheme! Early depositors get bailed out by future depositors!

Alternatively, the value of the coins must shrink to accommodate the loss of grains, but here is the thing. You are in a deflationary boom, you don't care about reality. But at some point you will try to spend your deflated money, right? Well, you will come crashing down to reality. The sudden price adjustment towards reality will cause a lot of inflation all at once.

Ok, so now that we know the dynamics of precious metal money even in the absence of government intervention, aka cycles of booms and busts.

We can now think about the motivation of the Roman Empire which is the most famous historic example of "debasement" because they were the first ones to do it on a large scale. Well, you see, the Roman empire was constantly expanding its borders to acquire new precious metal mines. This works until you run out of mines. In other words, it was a pyramid scheme that needs a constantly expanding territory.

So instead of thinking as precious metal money to be something aspirational, it would be smarter to realize that it doesn't work. I mean the easiest way to prove the idiocy of a gold standard is to point at all the fiat currencies that originated from a failed gold standard, which is basically all of them. In other words, fiat currencies aren't some kind of perversion of money, they are the late stage of a failed precious metal currency! It is easy to see why. Precious metal currencies don't circulate fast enough to clear the market because of their deflationary tendencies aka hoarding. So banks create a money substitute that is as good as the real thing but the problem is that the substitute can be hoarded as well so the problem can never be solved other than by substituting existing money with even more of the same hoardable money. In other words, the money supply has to rise all the time to accommodate uncoordinated/speculative saving decisions that have not been properly communicated to the market.

What I think is either sad or amusing, is that people think that these dynamics can somehow be avoided just by the government being tough enough on the economy to make all forms of money substitutes illegal, as if that wasn't some kind of massively disruptive government intervention.

Now let's go back to Ancient Egypt. If people hoarded the grain money, then the same dynamic would apply to that money right? The grain banks would have to create fake deposits for grains that don't exist and there would be constant runs on the banks, right? Except there is no historical evidence that this ever happened because people didn't want to pay the storage fee. Isn't it strange that this ancient civilization never recovered, even after thousands of years of Roman currency? Maybe the whole idea was a scam from the start. Permanence in our world is a meaningless concept. Your gold money will remain on earth billions of years after humanity has gone extinct, how exactly is it supposed to maintain its value?