The Inflation Question

Inflation is up and there is a debate about why this is.

One explanation is that consumer demand increased a lot because people are using their pandemic transfer payments and pandemic savings to buy goods and services. Producers have responded to this demand in part by ramping up production, e.g. by adding 5.8 million jobs in the last 12 months. But producers have not been able to increase output enough to satisfy all of the new consumer demand at existing prices. Thus producers have increased prices, which is also called inflation.

If this explanation is true, then you would expect to see business revenue go up, with some of that extra revenue going into wage increases and the rest of it going into higher profits, depending on the relative strength of workers and owners.

This explanation may or may not be a good one. It also may be something that partially explains the price rise while other factors explain the rest of it. I don’t have a strong opinion on it and I have yet to find a really persuasive piece on the topic one way or another.

But I have seen a lot of pieces and tweets and even some videos that appear to be offering a competing explanation that I find kind of perplexing. According to this explanation, companies are increasing prices for no particular reason other than that they want to make more money.

On its face, this is a hard theory to understand. Unless you think the desire to make money has increased significantly over the last year or so, this does not seem like a very plausible explanation for recent price developments.

Proponents of this view seem to think that higher corporate profits prove that they are correct. But recall from above that higher prices, higher revenues, and higher profits are exactly what the excess-demand explanation says will happen.

At times, proponents of the view seem to point to higher profits mostly as a way of saying that companies do not need to raise prices in response to excess demand. This is true of course: if a company, industry, or whole economy is swamped with more orders than it can fill, it could respond by raising prices or it could respond by selling out, limiting order size, creating waitlists, or similar.

The latter rationing approaches would avoid inflation but would result in similar kinds of frustrations for consumers. In all of the cases, many consumers would find themselves unable to buy what they want to buy, whether because it is unaffordable in the case of inflation or because it is unavailable in the other cases.

Do proponents of this view think that this is what companies should be doing instead? Is this meant to be an argument for using non-price methods to respond to excess demand? Or are we supposed to think there is no excess demand? Or is it that companies are systematically holding back output despite the now-higher prices that output could fetch? Or am I overthinking all this and this is one of those things where we are all meant to understand that this is just a messaging thing?