Why Is Inflation So Sticky? It Could Be Corporate Profits
Some companies might have been raising prices faster than their costs have increased
Inflation has proved more stubborn than central banks bargained for when prices started surging two years ago. Now some economists think they know why: Businesses are using a rare opportunity to boost their profit margins.
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Inflation rates also remain uncomfortably high in the U.S. and many other parts of the world despite interest-rate rises that have gone further and been delivered more quickly than at any time since the 1980s.
There have been good reasons for businesses to raise their prices in recent months. The supply-chain disruptions caused by the Covid-19 pandemic and the energy, food and raw-material bottlenecks that followed Russia's invasion of Ukraine have pushed costs higher.
But there are signs that companies are doing more than covering their costs.....
But these aren't normal times. In rare situations—such as an economy's reopening after a pandemic—widespread knowledge that costs are rising allows businesses to raise their prices knowing that their competitors will act in the same way, according to a paper by Isabella Weber, assistant professor of economics at the University of Massachusetts, Amherst, and her colleague, Evan Wasner.
That is a pattern the two economists said has played out in an analysis of recent earning calls in which executives at U.S. businesses present their financial results to analysts.
"We do have to think about pricing differently," said Ms. Weber. "A cost shock, or bottlenecks can create an implicit agreement among firms that raise their prices, so they can expect others to act likewise."....
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