Democrat candidate for President Kamala Harris says inflation is caused by corporate greed. She says corporations are price gouging as they push prices up. Corporations respond that they are charging market prices based on the demand for the product and their cost to supply a product. Increasing labor cost is pushing prices higher. The primary culprit is wages.
For at least a decade prior to 2021, inflation mostly averaged in the 1 ½% to 2% range. Wage increases averaged in the 2% to 2 ½% range. Consumers were happy with the moderate inflation and workers were generally happy since their wage increase exceeded the inflation rate.
Mostly due to massive increases in government spending and the resulting deficit, inflation began to increase in January 2021. At the same time the Federal Reserve forgot that price stability was the primary goal of Monetary Policy.
Throughout 2021 and extending to mid-2022, the Fed kept interest rates near zero and rapidly increased the money supply through their bond buying program as the inflation rate peaked at more than 9%.
The obvious solution to reducing inflation was to curtail government spending. But the Biden administration said that the government must spend more money, much of it to fight climate change. That meant it was up to the Fed to reduce inflation.
Beginning in June 2022 and lasting to September 2023, the Fed dramatically raised interest rates, which by 2024 did bring the inflation rate down to about 3%, where it is today.
Even though the causes of inflation are evident, Kamala says inflation was due to price gouging, meaning companies just raised prices because they were greedy. Corporations say that their higher prices are not due to their greed, but rather more to do with higher commodity and energy prices and to wage gouging.
For instance, the current average price for a new car is more than $48,000. In 2020 the average price was under $40,000. Much of that increase was due to higher labor cost. In the future car prices are likely to increase further because of wage gouging.
In 2023 auto workers sought a new four-year contract. They said because inflation was as high as 9% the prior year, they deserved wage increases three times more than they had received in the past.
If, as Harris says, inflation is due to price gouging, then the increased cost to produce cars must be due to wage gouging. Was it worker’s greed that pushed wages up?
After a lengthy strike, the workers settled on a new contract with the automakers. The four year contract resulted in most auto workers receiving a 33% wage and benefit increase. That will put even more upward pressure on car prices, as the automakers seek to maintain profit margins.
Once that happened, nearly all workers sought wage increases substantially above prior years. Health care workers in California received a 21% wage increase over a four-year period.
Partly because of the teacher shortage, teachers in many parts of the country doubled their wage demands. Instead of the typical 1 ½% to 2% annual wage increase, teachers sought 3 ½% to 5% annual wage increases.
The workers argue that they need the wage increase to keep up with inflation. In a Capitalistic economy need is not the basis for a wage increase. Wage increases are based on increased productivity. In Communism, wage increases are based on need. Paraphrasing Karl Marx, “Contribute according to ability. Paid according to need.”
In capitalism we might say, “Contribute according to ability. Paid according to the value of the contribution.”
It looks like workers are just getting greedy. They know that, mostly because of a labor shortage, they can demand large wage increases. The public would probably say that the workers deserve the wage increases and often pressure companies to comply.
But the higher labor cost will result in higher product prices. The question is which has more of an impact on inflation. Was it corporations price gouging? Or was it labor wage gouging?
_______________
Michael Busler is a public policy analyst and a professor of finance at Stockton University in Galloway, New Jersey, where he teaches undergraduate and graduate courses in finance and economics. He has written op-ed columns in major newspapers for more than 35 years.