In a striking counter-narrative to claims of corporate greed driving inflation, a new study by Federal Reserve economist Berardino Palazzo suggests that fiscal and monetary support measures are the real culprits behind the recent surge in US inflation. Palazzo’s research, outlined in a note on September 8, argues that corporate profit margins, when adjusted for the substantial financial support provided to the economy, were not excessively high in the wake of the COVID-19 pandemic.

The study offers a fresh perspective on the contentious issue of "greedflation" – a term coined amid accusations that companies have exploited increased demand to hike prices beyond their costs. High-profile progressives, including Democratic Senator Elizabeth Warren, have pointed to the rise in profit margins following the pandemic as evidence of this phenomenon. However, Palazzo contends that the perceived increase in margins was largely due to "unprecedented" government support for small and medium-sized businesses, coupled with the Fed’s accommodating monetary policy which significantly reduced companies’ net interest expenses.

Corporations Not to Blame for US Inflation Surge, Says Fed Economist

A new study by Federal Reserve economist Berardino Palazzo suggests that corporations are not the culprits for the recent surge in US inflation. Contrary to the narrative of ‘greedflation’ – companies exploiting increased demand to significantly raise prices – Palazzo argues that the rise in corporate profit margins post-pandemic can be largely attributed to substantial fiscal and monetary support.

Fiscal and Monetary Support Fuels Profit Margins

According to Palazzo’s research, released in a note on September 8, corporate profit margins were not unusually high following the Covid-19 pandemic, once accounting for the extensive fiscal and monetary backing provided to the economy. He claims that these margins were amplified by government assistance for small and medium-sized businesses, along with the Fed’s accommodating monetary policy, which drastically reduced companies’ net interest expenses.

Democrats’ ‘Greedflation’ Narrative Questioned

Prominent Democrats, including Senator Elizabeth Warren of Massachusetts, have pointed to the increase in profit margins as proof of ‘greedflation’. This term has come to represent corporations leveraging the increased demand during the pandemic to hike prices far beyond their costs. However, Palazzo’s study challenges this narrative, suggesting a less sinister explanation.

Profit Margins Return to Pre-Pandemic Levels

The study also provides a forward-looking perspective, predicting that by the end of 2022, aggregate profit margins will fall back to their pre-pandemic levels. This is after accounting for fiscal and monetary interventions.

Takeaways

The narrative of ‘greedflation’ has been a popular one, but Palazzo’s research provides a compelling counter-argument. It’s important to consider the significant role of government support in boosting profit margins during these unprecedented times. While corporations have undeniably benefited from increased demand, attributing the inflation surge solely to their actions may be an oversimplification. As we move forward, it will be crucial to continue analyzing the multifaceted impacts of fiscal and monetary policy on the economy.