Dear Ted and Jody:
With reports in the news of late that corporate profits were higher during the recent/current inflationary “cycle,” I began to wonder about the impact of corporate profits on inflation. So, I googled it and found a paper put out by the St. Louis FED:
How Much Have Record Corporate Profits Contributed to Recent Inflation? By Andrew Glover, José Mustre-del-Río, and Alice von Ende-Becker
“We find evidence that markup1 growth was a major contributor to inflation in 2021. Specifically, markups grew by 3.4 percent over the year, whereas inflation, as measured by the price index for Personal Consumption Expenditures (PCE), was 5.8 percent, suggesting that markups could account for more than half of 2021 inflation.”
1. markup=selling price – cost of production
Now it is not the case that corporate markup growth contributed to the inflation in the run-up to or during the COVID19 pandemic. So, it would be a mistake to attribute corporate profit growth as a/the cause of inflation. At least corporate profit is not a simple cause of inflation. Not knowing the economic literature on the relationship between corporate profits and inflation, I am going to guess that economists have fully examined the relationship. Nonetheless, I still wonder why corporations found it necessary to inflate their profits during an inflationary period? The authors of the St. Louis FED article said, “because they could”–lack of competition was one reason they cited.
That markup growth explained (a statistical sense of explanation) over half the rate of inflation in 2021, yet, was not a factor in the COVID19 inflation is a strange finding for one trained in the empirical Social Sciences. We tend not to find a menu of explanations for events. Rather we find, when we have interval or ratio data, that models like regression analysis tend to provide statistically significant models. For example, Inflation is a fiction of the variables x1 through xn, where corporate profits would be one of the xi. Perhaps one should then look at change in corporate profits rather than just markup growth.
This is going to take more thought and some statistical analysis.
Mornings have not been very photographically productive. So, far, evenings have been.
Both last evening and the evening before last, the moon played hide ‘n seek, but came out from behind the clouds enough to be captured.
Love, Ed
DearTedandJody 
Ed, I like the photos, particularly the first one showing the curve in the road. I am not up to your standard of mathematics to fully understand what you are saying, but the following is what I think based on my observations. As you would know, mark-up, if higher than running costs, equals profit. I believe that the main reason for inflation (higher prices) during the last few years is based on two things. Firstly, the pandemic upset the normal economic balance amongst the general population when few knew what the future would look like. That confusion and uncertainty created a climate where businesses could up prices without the media and the general population realizing it was happening. The fact that some commodities became hard to get added to the worry and confusion. Few worried about inflation during this time as there were far more worrying things going on. Once businesses realized they could raise prices with little ramifications, they did and have continued to do so after the pandemic finished. The Fed’s comment, “because they could,” is obviously correct and applies equally to the economic situation here. It is obvious here, and I assume the same applies in the US, that the supply chain disruptions that occurred during the pandemic have not fully recovered. I think that uncertainty assists many suppliers in raising prices without any immediate penalty. This limits competition and therefore prices are increased, again, “Because they can”! The general price increases that are currently occurring are the result of the average consumer expecting the prices to go up, so they do. The final retail price is the result of every company or individual in the chain increasing their prices slightly. It compounds with each step, and sometimes, there are many steps in that chain. One obvious observation is that the saying “the rich are getting richer and the poor are getting poorer” is especially true in the current economic climate. Most large companies here have made record profits in the last few years, and the well-paid are not really feeling the current inflationary climate yet. They are still spending regardless. The top end of the housing market here has gone absolutely mad, and car sales are at record levels. It is not the average consumer causing this. The wealthy keep spending and the rest pay the penalty. I will now call it quits, even though one could go on. Thanks for reading this lengthy response to what appears a simple question. All the best, Phil
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Phil:
I could not agree with you more. there is a lot fo truth packed in to your sentence: “The wealthy keep spending and the rest pay the penalty.”
Warmest regards, Ed
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Lovely moon!
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Thank you. Warmest regards, Ed
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I never fail to be impressed by your detailed photos of the moon. I have never seen better from an ‘amateur’ photographer.
Best wishes, Pete.
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Thank you ever so much. Warmest regards, Ed
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