Why Is Inflation High? Broken Supply Chain, Corporate Greed
By Sophie Shea, Policy Analyst
What’s causing inflation?
Amidst the turmoil of shutdowns, testing, masks, and all the other disruptions to daily life caused by the pandemic, now rising costs everywhere from the gas pump to the dinner table have created financial challenges for families across the country. Shutting down and reopening the entire global economy produced a prolonged shock felt by the entire world, and panelists at a recent event hosted by nonprofit news outlet ProPublica said it precipitated the highest U.S. inflation in more than 40 years. The biggest drivers? Extremely high global shipping costs, a failure of our “just-in-time” supply chain, and record-breaking high corporate profits.
Why are shipping costs so high?
Reporting from ProPublica journalist Michael Grabell, one of three panelists at the event, found that three ocean shipping conglomerates control 90% of the transportation of U.S. imports. Carrier rates for shipping between Asia and the U.S. have increased by over 1,000% from January 2020 to today, according to Grabell. A White House analysis estimates that the ocean shipping industry made a record-breaking profit of $190 billion in 2021, which is seven times more than 2020 profits and 5 times more than the profits accumulated over the decade of 2010-2020.
A rise in predatory and potentially illegal penalty fees contributes considerably to the sharp increase in international shipping costs––and profits. The fees in question are called demurrage and detention, which are essentially late fees. During normal times, they act as an incentive to maximize the efficiency of the flow of goods. However, pandemic shutdowns and a rise in consumer spending caused massive congestion in U.S. ports. Despite gridlock in the ports creating scenarios where on-time delivery became impossible, shipping companies continued to charge these exorbitant fees.
Reports also find that ocean carriers are engaging in predatory practices in the pickup stage as well. Importers of perishable goods complained that while they struggled to pay the high fees, their fruits and vegetables were left to rot. Several other businesses have filed complaints concerning ocean carriers’ exploitative behavior, and recently Congress approved the Ocean Shipping Reform Act, which gave the Maritime Commission more power to crack down on exploitative fees. However, more policy action is needed to effectively address predatory practices and corporate profiteering.
What happened to the supply chain?
While the pre-pandemic supply chain brought consumers cheap goods, existing infrastructure was not resilient enough to withstand the shock brought about by Covid, according to Dr. Rakeen Mabud, chief economist at Groundworks Collaborative and a panelist at the event. Mabud argues that brittle supply chains have been strategically cultivated across decades of corporate consolidation and disinvestment.
The strategy of megacorporations to corner vital markets put them in a prime position to take advantage of economic shocks and raise their prices at rates that are actually higher than inflation. Additionally, with a market set up to give corporations lots of power and little oversight, CEOs can raise prices without the threat of competitors undercutting them. While this has brought cheap prices in the past, corporate consolidation has come at the cost of resilient and stable supply chains for consumers.
Are corporations using inflation to raise prices?
Beyond the inflation we’re all feeling, groups like Groundwork and the Economic Policy Institute (EPI) argue higher corporate profit margins are responsible for more than half (53.9%) of consumer price increases. While some have pointed to rising wages as a driving force behind inflation, the same research from the EPI finds that labor costs have contributed to less than 8% of the rise in costs. Recent polling from Data for Progress and Groundwork Collaborative finds that 63% of voters agree that “large corporations are taking advantage of the pandemic to raise prices unfairly on consumers and increase profits.”
Additionally, Groundwork Collaborative found that corporate leaders are excited about the prospect of inflation as a means to increase shareholder profits, a sentiment expressed openly on public corporate earnings calls with shareholders. On one earnings call, Kroger CEO Rodney McMullen, whose company recently lost a labor battle with striking grocery workers in the Denver Metro Area, even went so far as to tell investors that “a little bit of inflation is always good in our business.”
What about high gas prices?
Panelists at the ProPublica event pointed to the war in Ukraine as a reason why fuel prices have climbed so high, but consumers shouldn’t expect to get any help from oil and gas companies. As gas prices continue to spike, fossil fuel producers have made it clear that they’re fine with limiting production and riding the cash cow of record high gas prices.
Elsewhere, the first public lands leasing sale of the Biden era resulted in some land parcels going unsold in Wyoming, Colorado, and other western states, which CFI’s Pegah Jalali recently told the Associated Press was a sign that oil and gas companies weren’t actually interested in boosting domestic oil production, just maximizing their profits.
Will raising interest rates actually stop price increases?
In response to rising inflation, the Federal Reserve began raising key interest rates earlier this year. This comes despite the fact that many economists, including Groundwork’s Dr. Mabud, predict this could lead to a recession without having any effect on the price of groceries or gas. Mabud argued during the ProPublica panel discussion that aggressively increasing interest rates would “artificially [create] a recession [and] put millions of people out of work, especially Black and Brown workers,” and called the notion of putting all our hopes in Fed action to solve inflation a “fundamental misunderstanding of why we have rising prices in the first place.”
Based on Federal Reserve Chairman Jerome Powell’s own comments, it does not appear he’s concerned about workers. In May, when Powell announced a large 0.5% interest rate increase he told reporters at a press conference that raising interest rates and reducing hiring demand “would give us a chance to get inflation down, get wages down, and then get inflation down without having to slow the economy.” Though workers have seen their wages increase in the past two years, that’s after more than 50 years of essentially stagnant wages.
The other panelist, economist Dr. Claudia Sahm, argued that “the Federal Reserve can do nothing to get gas and food prices down,” and said it’s Congress and the Biden administration who have the power to address the supply chain and shipping issues that are driving inflation.
What policies will help address the real causes of inflation?
In order to attack the root source of inflation, policymakers must crack down on corporate profiteering and invest in more resilient and equitable supply chains, says Dr. Mabud. She suggests an array of tools that Congress can use: a federal price gouging statute, taxing corporations more effectively through a windfall tax, and generally implementing more aggressive corporate taxation. She also recommends empowering the Department of Justice and the Federal Trade Commission to enforce corporate regulation and investing in clean energy sources to avoid the economic, climate-related, and geopolitical problems of fossil fuels.
Dr. Sahm questioned why prices were so low pre-pandemic and argued that the globalization of production and the ensuing race to the bottom are considerable contributors to historic low prices. Dr. Sahm says, “the thing about inflation is understanding exactly how we had gotten all those really low prices. We have gotten these low prices off the backs of workers in Asia, people who get very low pay in the United States. These systems that are just put together with shoestring and bubblegum… Fixing these systems may come with a cost, but a benefit will be a more resilient and a more equitable system.”
