During previous [financial] shocks in the euro area, firms had tended to absorb rising costs in profit margins, as slower growth made consumers less willing to tolerate price hikes. But the special conditions we experienced last year turned this regularity on its head.
The sheer scale of input cost growth made it harder for consumers to judge whether price hikes were caused by higher costs or higher profits, fuelling a faster and stronger pass-through.
At the same time, pent-up demand in reopening sectors, excess savings, expansionary [government] policies and supply restrictions brought on by bottlenecks gave firms more scope to test consumer demand with higher prices.
OK. Note, “in the euro area”.
But this morning the government minister on the news round is claiming that inflation is caused by public sector wage increases, monetary policy (they are now blaming QE) and supply chain disruption. It’s time they stopped the nonsense and started talking about why we still have inflation, and those are not relevant. To claim they are is just misinformation in pursuit of class warfare.
We’re not in the euro area.
Apparently inflation is purely down to ‘Corporate profiteering’
That is a level of ignorance that is almost invincible
Why are the remoaners telling us that prices, inflation and general shittiness of the UK is solely the result of Brexit, Germany is in recession, Consumer inflation in the Netherlands is 10%, GDP in Ireland fell 4.6% in the first quarter……..
Germany is in recession, Consumer inflation in the Netherlands is 10%, GDP in Ireland fell 4.6% in the first quarter……..
The Remainer response to this is laugh reacts.
Generally speaking, Remainers aren’t serious, or intellectually curious people.
Speaking from the euro area, we’ve certainly seen some startling price rises here. 30% over a very short period in some sectors. And I can’t see much to justify them. Input prices may have risen. But other costs like rents, deployed capital, labour costs etc are either unchanged or lag.
My opinion’s they’ve just been trying to claw back the turnover lost during the Covid restrictions, like making a profit is a right. But by doing so, they’re just pricing themselves out of their own market. We will see. With tourism, your victims are already committed when they arrive. The best they can do is try to economise where they can. It’s the following year when they fail to return, it bites.
V_P, as with the 28 energy suppliers that went bust despite making ‘massive profits’, Thames Water is going bust because they were too good (ala’ Swiftmobile).
The sheer scale of input cost growth made it harder for consumers to judge whether price hikes were caused by higher costs or higher profits, fuelling a faster and stronger pass-through.
This makes no sense. It is an economically tinged fever dream.
This makes no sense. It is an economically tinged fever dream.
I’d say it makes sense here, Dennis. Sure businesses suffered losses & lost profit during the Covid debacle. But then they weren’t having to pay for a lot of the inputs* & there was the government assistance schemes. From what I can see, they’re trying to not only recover the losses but also the missed profits. Can you expect to have made profits when you effectively not trading? They seem to think they should. You certainly can’t explain the price rises by input costs.
It seems to be a small & medium business thing. The big corporations haven’t reacted the same. I suppose with the people who own them, they were accustomed to a certain level of benefit they enjoyed from the enterprise, they lived of their fat & didn’t change their spending when they weren’t trading & now they’re expecting to rebuild that fat as quickly as possible. And of course, with us, it’s pretty well all small & medium businesses. Take recently with taxis. Big fare hikes justified by the increase in fuel costs. Except fuel costs are now virtually back where they started. Fares aren’t coming down though.
*With some of the business I’m talking about, the inputs are so coupled to turnover they virtually dropped to zero. Just the fixed costs.
I was referring to his contention that consumers cannot judge whether price hikes were caused by higher costs or higher profits. Murphy seems to think tens of thousands of businesses selling millions of products to hundreds of millions of people across thousands of different industries will all exhibit the exact same behaviors to a uniform set of inputs… Which he can then neatly package and put forth as THE TRUTH.
And even if consumers can accurate judge such a thing, what difference would it make to said consumers? Does such knowledge enable them to somehow mitigate their increased costs?
Except fuel costs are now virtually back where they started.
That may be in Wogistan, where you live, but sure as shit isn’t the case here in ‘Merica.
Murphy seems to think tens of thousands of businesses selling millions of products to hundreds of millions of people across thousands of different industries will all exhibit the exact same behaviors to a uniform set of inputs…
But a lot of that is accessed by the consumer through small & medium businesses.
I suggest we tend to think of these people as theoretical market capitalists. I doubt if they are. They don’t read Tim for a start. Joe sees Fred across town has put his prices up. Fred doesn’t seem to have suffered from doing so. Shopper choice inertia is pretty powerful. Joe puts his up to match. Why should Fred make all the money? Rince & repeat. Sure you can have big individual players in a market. But as long as they keep their price edge over the SMB’s …
It doesn’t have to be a conspiracy or something. It’s just individuals reacting to incentives. But the incentives are not always what you think they are.
Long on hypotheticals and short on facts.
Of course it’s short on facts, Dennis. Why government planning never works. One can never know what’s going on in the heads of an entire economy. But I can’t see any reason for them necessarily to be completely rational. Humans generally aren’t. In economics one presumes it, averaging a large enough sample. But it’s only a presumption
J Jessop has done a short thread on what the IMF said.
https://twitter.com/julianHjessop/status/1673728770480517120
“The only real answer is to correct the original mistake, which was that monetary policy has been too loose for too long. Any distributional problems are separate and need other solutions.
NB. this was the conclusion of the IMF paper too”
Dennis. I’d argue that the fuel costs are virtually back where they started because, at least in this instance, the market worked.
The Russkies naturally just sold all their oil cheaply to the Injuns and the Chinks. The more expensive oil they would otherwise have bought went to us. As for the US, Biden instituted the sanctions so he had to back them up. And also back up his no fracking, no pipelines nonsense.
We were looking at a short vacation later this year and prices where we were looking have gone up significantly since Covid, will be interesting to see what happens when the pent up demand from not being allowed to travel wears off
If inflation is down to profiteering, how does that work?
Inflation has been high for to years or so. We’d have seen massively expanded profit margins by now surely?
He doesn’t understand anything really and that’s very clear: There are many causes of inflation:
1/ Net Zero – unquestionably an enormous cost, compounded by government intervention to further distort the market
2/ Unlimited QE – dating back as far as it goes. What’s hilarious about Murphy is although he hates the Corbynites (in part because he didn’t get made Chief economic advisor to Mcdonnell) he shares with them a classic characteristic in that while criticism of his over -generalizations is ‘neoliberal’ or ‘fascist’ his own positions are highly nuanced and clever – so the models that a classical economist advocates don’t work instantly and are therefore wrong, while MMT ‘takes time to work’
3/ The boat people and other unlimited migration since 1997 – Obviously more nuanced as certain immigration does drive up output but again it will increase demand for goods and services as well (especially housing) so a key driver
4/ COVID lockdowns and overall response to the ‘Virus’ – he still advocates lockdown and Zero COVID (there was another post over the last few days) thus proving he is among the most evil men on the planet. Certainly there has never been a policy more injurious to me on a personal level than lockdown and I would make its advocacy a criminal offence. The impact on inflation has been utterly disastrous
5/ The War in Ukraine – calamitous on every level and seemingly with no endgame or even a middle game as the Ukrainian offensive flounders.
6/ Diversity, Inclusion and Equity (DIE) – and other assorted paraphernalia within new legislation which has proven utterly ruinous to almost every business in the country and has basically penalized the country’s most productive people
7/ Corporate profiteering – There’s certainly been an element of that as the BiS points out but I’d argue its well down the list of causes.
Of course he is in favour (or at best ambiguous in the case of the Russia war) of 1-6. That’s why it’d not be far off to say he is arguably responsible for inflation directly. And people suffering its effects ought to be headed to Ely with a length of rope looking for a tree…(just don’t start with the pubs…)
@bloke in spain – “Can you expect to have made profits when you effectively not trading?”
That does not matter. For example, suppose you start a business as a taxi driver. You buy a taxi with a loan and start trading. If you have a period where you cannot trade – regardless of the reason – you still have to keep up payments on your loan. This means that once you resume trading you must make up the lost profits. If you fail to do so you’ll go bust. There are two ways that large businesses can avoid this. Firstly, they can be sufficiently diversified that trading in one area continues and can generate enough profit to keep the rest viable, and secondly, the sheer size can make it fairly easy for the business to just keep going past the point of viability because outsiders are paying for it (e.g. suppliers think they’ll get paid, lenders provide more loans, because the reputation of the business falsely suggests it’s still a good idea).
@Boganboy – “The Russkies naturally just sold all their oil cheaply to the Injuns and the Chinks.”
This means that Russia gets less money for its oil, which is the purpose of the sanctions (ideally, they’d get nothing, but that is well beyond possible). A nice side-effect is that India and China get cheaper oil, which makes them less likely to support Russia.
@Van_Patten – “unlimited migration since 1997”
There has been no such thing, except in the wild imagination of xenophobes. Just because some people evaded the restrictions does not mean that that was everybody who wanted to.
– “I would make its advocacy a criminal offence”
Well, I think that shows the level of respect you have for freedom of speech.
– “Ukraine … no endgame”
Endgame is Russia driven out of Ukraine (including Crimea etc). If the supply of arms from abroad is sustained, such a result is inevitable.
“I suggest we tend to think of these people as theoretical market capitalists. I doubt if they are. They don’t read Tim for a start. Joe sees Fred across town has put his prices up. Fred doesn’t seem to have suffered from doing so. Shopper choice inertia is pretty powerful. Joe puts his up to match. Why should Fred make all the money? Rince & repeat. Sure you can have big individual players in a market. But as long as they keep their price edge over the SMB’s …”
Which is exactly my point – economics is the study of what people do with their money. Note the ‘people’ bit in there. What people do today in response to some stimulus may not be how they react to exactly the same stimulus in a week or a month’s time. They are people after all and people behave like sheep. When Fred puts up his prices in more normal times, everyone thinks ‘Idiot, he’ll lose all his trade, and if we keep our prices low we’ll get it’. Now they think ‘Hey Fred’s getting away with higher prices, we better stick ours up too!’. Exactly the same scenario, totally different response. Because people aren’t machines, they are bags of emotion and fears, who can change their collective viewpoint on a sixpence.
But of course economists think they are studying maths…….
“This means that Russia gets less money for its oil, which is the purpose of the sanctions (ideally, they’d get nothing, but that is well beyond possible). A nice side-effect is that India and China get cheaper oil, which makes them less likely to support Russia.”
That makes zero sense at all. Western sanctions on Russia mean India and China can get cheap oil from Russia (which they then sell on to the West at a vast markup) and this is supposed to mean they won’t want to support Russia in its war with Ukraine? They have every incentive to support Russia, and keep the war going as along as possible, because they are making out like bandits! Why on earth would they want the war to end, and with it their source of below market price oil, and massive profits?
‘They have every incentive to support Russia, and keep the war going as along as possible, because they are making out like bandits! Why on earth would they want the war to end, and with it their source of below market price oil, and massive profits?’
I can only agree Jim.
@Jim – “They have every incentive to support Russia, and keep the war going as along as possible, because they are making out like bandits!”
Only if Russia is losing and they can get away with providing such support. If provision of support causes them too to suffer sanctions, that would make it a bad deal. Sanctions could hurt them a lot more than they hurt Russia as Russia trades a lot less with the West.