What's to Blame for Inflation?

Politicians rarely take responsibility when their ill-conceived policies don’t work out.  It is far easier to engage in the “blame game.” And if the circumstances play out just right, then the crisis may even cynically serve as a justification to enact even worse policies.

As a prime example, take inflation.

When President Biden took office in January 2021, inflation was holding steady at 1.4%. But by June 2022, the inflation rate skyrocketed to 9%—a level not seen since 1981. As of this writing, inflation remains near 7%. 

To be fair, Covid-related supply chain problems were (and continue to be) a contributor to rising prices across the globe. But it would be intellectually dishonest to ignore the “fiscally-induced inflation” caused by the trillions in government spending injected into the U.S. economy over the past two years that has produced sizable increases in both disposable income and the money supply. 

Prices rise when too much money chases too few goods. Empirical analysis by economists at the Federal Reserve estimate that the high inflation in the United States relative to peer nations is explained by the federal government’s higher spending on social programs during the Covid pandemic. Among other government spending blow-outs, these economist note that the American Rescue Plan Act of 2021 (ARP) “resulted in an unprecedented injection of direct assistance with a relatively short duration.” 

The pernicious effect of profligate spending on inflation should come as no surprise. Even Obama-era economists Lawrence Summers and Jason Furman warned that high inflation would result from massive government spending packages in times of low unemployment and supply constraints. These warnings proved prescient.  

Which brings us to today’s edition of the “blame game.”  

Efforts are underway to shift attention away from the federal government’s reckless spending onto whatever scapegoats politicians can find. Many often point to industries operating in markets characterized by few firms (e.g., the oil industry, drug makers, meatpackers, and internet service providers) as the culprits. Economist Hal Singer argues that market power (industry concentration) is a key contributor to the nation’s inflation woes, claiming that high inflation provides cover for concentrated industries to raise prices through tacit collusion.  

Demonstrating once again the old adage that a political crisis should never go to waste,  attributing price increases on high industry concentration has become a pretext for the Biden administration to call for both aggressive antitrust enforcement and expansive new economic regulation by the Lina Khan-led Federal Trade Commission (FTC).

There are some obvious problems with this economic argument, however.

Coordinating pricing, explicitly or tacitly, would seem more difficult during times of economic chaos. Likewise, supply constraints make even competitive industries behave in ways that look monopolistic, because output expansions and entry are precluded by the lack of necessary inputs, including labor. Moreover, any argument to address market concentration through policy must realize that market concentration can be an equilibrium outcome and not the consequence of nefarious behavior or policy failures. When sunk costs are large, only a few firms can exist in equilibrium.

As rhetoric can be tested by evidence, in new research from the Center for Growth and Opportunity at Utah State University I decided to see if this claim is true.

Analyzing trends in the Producer Price Index (PPI) for several hundred industries using data from 2015 through February 2022 (the latter marking the Russian invasion of Ukraine and the decoupling of the Russian economy), I compare change in prices during the Covid shutdowns and after President Biden’s inauguration when inflation rose rapidly. I find no evidence that prices rose more in highly concentrated industries during either the heat of the pandemic or Biden’s tenure as president. As such, more concrete evidence of actual collusion is required to justify FTC intervention in markets. 

But given the current leadership of the FTC, I fear that the lack of evidence may still be no barrier for government intervention.

Last November, the FTC issued a new policy statement on how the FTC will enforce claims of “unfair methods of competition” under Section 5 of the FTC Act. To put it politely, the FTC’s 2022 UMC Policy Statement takes an extremely expansive view of its statutory authority. Rejecting the traditional “consumer welfare” standard and rule of reason analysis, the FTC now focuses upon whether conduct will “tend to negatively affect competitive conditions,” even in the absence of any showing of market power or market definition or even a formal showing of any “actual harm in the specific instance at issue.” As retiring FTC Commissioner Christine Wilson wryly noted, the FTC has now adopted a “’I know it when I see it’ approach that seeks to protect interests beyond those of consumers.”

Like it or not, the crushing inflation Americans are currently suffering under is a mix of supply-side issues and excessive government spending. Rather than use inflation as a flimsy pretext for more government intervention into the market, perhaps more fiscal discipline and policies aimed at restoring supply chains are in order.

Dr. George S. Ford is the Chief Economist of the Phoenix Center for Advanced Legal & Economic Public Policy Studies (www.phoenix-center.org), a non-profit 501(c)(3) research organization that studies broad public-policy issues related to governance, social and economic conditions, with a particular emphasis on the law and economics of the digital age.