These days, it seems like everyone has a few important questions on their mind: Is the economy still in the gutter? Or are things getting better? Does inflation mean prices will stay high forever, or will these prices eventually come back down?
There’s been some developments that suggest good news is around the corner. A version of the Build Back Better agenda was passed—significantly pared down but still, passed. Hundreds of thousands of jobs continue to be created each quarter, and the Inflation Reduction Act (IRA) was passed. Finally, inflation in key sectors has begun to cool off.
That last point is key, especially if your wallet has been feeling pinched as prices have skyrocketed over the past year. Data released on August 10 shows that inflation is still elevated but falling—from June to July, the CPI's rate of increase went from 9.1 to 8.5 percent. Still, with supply chain crises linked to COVID-19 shutdowns and Russia's invasion of Ukraine, prices are likely to continue to inflate.
“Since WWII, we haven't seen prices across the board come down in a sustained way—when prices rise, they tend to stay high”
This raises the question of when—if ever—prices are going to come down to pre-pandemic, let alone pre-inflation levels? According to economists Motherboard spoke to, they most likely never will if corporations are left to their own devices.
"Big corporations know that consumers will be forced to put up with higher prices, especially for necessities like housing or gas that people cannot live without. Since WWII, we haven't seen prices across the board come down in a sustained way—when prices rise, they tend to stay high for long periods after the initial price hikes,” said Dr. Rakeen Mabud, chief economist and managing director of policy and research at the Groundwork Collaborative, in an interview with Motherboard.
On the day the August inflation report was released, Groundwork published a report showing that rent inflation was just one of the concerning areas that would persist at great cost to everyone. Rent, which makes up about a third of the CPI, accounts for a major driver of inflation and is important for a few reasons: not only can it not be cut down like other expenses and hikes can drive people into homelessness, but the CPI consistently underestimates rental inflation because "it doesn't factor in rising prices in new rentals and leases" nor does it capture regional variation or rental increases since the pandemic began, according to Groundwork.
Rent inflation has been driven not only by the pandemic, but by landlords themselves. In New York, landlords lobbied for the highest rent increase in a decade for about one million rent stabilized apartments, citing concerns about inflation. But as Groundwork points out, the majority of these units are owned by "landlords who rent more than 1,000 units and can easily weather higher costs, unlike tenants." On top of that, once higher rents are locked in, they are unlikely to go down significantly as tenants accept the new reality.
"Consider the housing market—even as inflation starts to cool off, housing prices and rents have continued to increase. Corporate landlords are downright gleeful about this dynamic,” Mabud told Motherboard. They pointed to a late 2021 earnings call where the CEO of corporate landlord Starwood Capital said that inflation in consumer prices and wages is “an extraordinary gift that keeps on giving” and added that “tenants seem capable and willing to pay these rent increases.”
What other prices will stay high? "We can be fairly confident that prices will continue to rise in the non-competitive sectors of the economy, such as pharmaceuticals and refineries. The pharma-related constraints in the Inflation Reduction Act, for example, won't hit for a few years, and even then will only touch a handful of drugs,” Hal Singer, managing director at the consulting firm Econ One and adjunct professor at Georgetown's McDonough School of Business, told Motherboard.
The thing is, while commodity prices fluctuate in wholesale markets and will likely go down, companies have a different relationship with consumers. Thanks to the market power that firms enjoy because of corporate concentration, as well as eager use of inflation as cover for price hikes, prices across the entire economy are unlikely to fall at notable rates for a long while, and in some cases, maybe never.
For well over a year now, firms have not only been testing how far price hikes can go, but getting away with it too. In July 2021, The Wall Street Journal reported that numerous major corporations are experimenting with how high they can raise prices and that executives have hinted that such increases would persist past the point of being justified by inflation. “You don’t generally get a customer to accept inflation-justified pricing until they’re confident it’s not transitory inflation,” Conagra CEO Sean Connolly told investors recently, the outlet reported.
“Once a new price point has been established, firms are reluctant to move prices downwards, recognizing that consumers have already accepted the higher price”
As an example of this trend, Mabud pointed to automotive parts retailer AutoZone. "The company’s CEO told investors last quarter that ‘following periods of higher inflation, our industry has historically not reduced pricing to reflect lower ultimate cost,’” they said, adding that the chief executive of paint supplier PPG also said something similar recently. “When an analyst asked the paint company PPG Industries whether they plan to give some of the pricing back as the costs of raw materials subside, the CEO did not miss a beat: he made it clear that ‘we’re not going to be giving this pricing back’ because the higher prices are “being accepted by our customers," said Mabud.
"Prices are sticky downwards. In other words, once a new price point has been established, firms are reluctant to move prices downwards, recognizing that consumers have already accepted the higher price,” Singer told Motherboard. “The best we can hope for now is price stability. But don't count on prices reverting to pre-pandemic levels."
All of this raises the important question of how society can combat this tendency toward ever-increasing prices for consumer goods and essentials? The answer, according to experts, is policy; after all, we are where we are now because of policy choices.
“Sadly, we are living in an economy designed by and for big corporations to maximize their returns. Decades of deliberate policy choices have resulted in a deeply concentrated economy and a brittle supply chain that prioritizes short term profits for shareholders over an effective system that actually delivers goods on time. That means that when we experience shocks like a pandemic, we inevitably experience bottlenecks and shortages that drive up prices.”
Gasoline prices, for example, subsided over the past month and fell 7.7 percent on the price index thanks to a multitude of factors. Sure, high prices may have discouraged consumers from driving and encouraged states to cut gasoline taxes, but the core driver was the fall of crude oil prices. That was driven by a host of trends ranging from a drop in demand thanks to COVID-19 shutdowns in China, dipping into strategic reserves, and global fears of a recession—not by oil producers, who settled on profiteering to take advantage of the inflationary period.
"We need a reorientation of public policy, including antitrust, to challenge the idea that consolidation is a good idea”
None of these are trends that will durably persist—demand will rise again, we will stop dipping into the reserves, and recession fears will abate as they have already begun to. More permanent fixes such as shifting demand by increasing production or reducing demand as part of a green transition away from fossil fuels are out of the picture, for now.
If we are interested in not just stabilizing prices or bringing them down, we need to undermine the political economy that allows high prices to emerge and persist.
"’How do we bring prices down' is sitting on top of a deeper question,” Stacy Mitchell, policy director at the Institute for Local Self-Reliance, told Motherboard. "We need a reorientation of public policy, including antitrust, to challenge the idea that consolidation is a good idea. What we really need is public policy oriented around creating decentralized systems of production and distribution that are more resilient and diversified. That means a reorientation of antitrust policy to be more aggressive about breaking up companies and blocking mergers. It also means a restructuring of our banking system so instead of capital flowing to the biggest companies, we actually have capital flowing out to small companies and startups."
Over the past few years, progressive reformers have been championing antitrust—that is, state intervention to roll back corporate consolidation in sectors of the economy—as a tool to reshape the underlying political and legal order of our economy that prioritizes corporate power and consolidation, but there are other tools that should be used at the same time. Last week, two economists (Isabelle M. Weber and Meg Jacobs) wrote a Washington Post piece that argued inflation could be fought with price stabilization as well as price controls—regulations to literally freeze or cap prices of goods and services—instead of interest rate hikes that punish workers the most. The former, they argue, can actually be part of a larger strategy to revitalize our economy and prioritize the prosperity of workers and the general public, while the latter requires breaking those groups through mass layoffs that reduce the ability of consumers to spend and contribute to inflation.
“Carefully selected caps could buy time for the important supply-side measures in the legislation to come into effect, while also tackling short-term price spurts driven by today’s emergency conditions,” Jacobs and Weber wrote. “Doing so would preserve purchasing power instead of erasing it and can create an economic environment that encourages urgently needed investments—public and private alike—in workers, care, education, infrastructure, climate mitigation and more.”
Weber and Jacobs point out that despite the vitriol economists now regard price controls with, they have worked in key moments. During World War II, price ceilings on sectors that contributed to inflation—such as meat and fuel—were paired with a use of government boards to determine what was excessive: "Each company, shopkeeper, landlord or butcher was entitled to make a profit but not to profiteering. They had to 'hold the line,' sticking to the same profit margins as before price controls went into effect and obeying ceiling prices on specific goods."
This, combined with the government encouraging consumers to report price ceiling violations, meant price controls curtailed prices hikes and inflation, sustained an economic boom, and saw those at the bottom of society's hierarchy enjoy the greatest income gains. Price controls deployed years later by Nixon in the midst of inflation sparked by the Vietnam War, oil supply shock, and food price hikes, were cynically rolled out ahead of a reelection change and weren't paired with the social mobilization that made World War II's successful, Weber and Jacobs argue.
"The key to price stabilization, then, lies in politics: a strong alliance and a broad-based social commitment are crucial for the effective implementation of selective controls as a way to tamp down inflation,” they wrote. “The damage done by the price shocks in 2022 makes this combination possible because it’s hurting consumers as well as powerful corporations such as Walmart, that have built their business models on low-cost consumer goods. This creates an unlikely opportunity for a broad alliance to push for a political effort to stabilize the prices of essentials.”
Congress has started to take steps in that direction in the form of the Emergency Price Stabilization Act and the Inflation Reduction Act. The former, introduced by New York Rep. Jamaal Bowman, would empower the White House's supply chain disruption taskforce to handle inflation drives linked to supply issues. As Weber wrote in The Guardian with economist Mark Paul, it could push Biden to deploy price stabilization measures (including price controls) in key goods and services: "gas, housing, food, electricity, etc."
Price controls can be thought of as one of the major ways to address the problem of inflation, but in our dysfunctional economy it cannot end there. We need more data on corporate profits to identify profiteering and the role it plays in inflation and we need investments in our capacity to provide key goods and services whose disruption leads to supply-driven inflation, as Weber and Paul point out.
We also need to go after price fixing and collusion among dominant firms, curtail mergers that are rolling up the economy, and break up giants that dominate various sectors. Doing so will not only allow us more room to curtail prices, but more importantly do so while ensuring better working conditions and general prosperity. The alternative—raising interest rates—is an easy stopgap measure that does nothing but reinforce the status quo; it is an economic policy that passes costs onto the public and workers, neglects productive infrastructure, and prioritizes corporate power instead of public interest.