Inflation: An Accepted Business Practice

 Abstract

Inflation’s causes can be confusing to the average American. Many people hold a false belief that businesses are not the cause of cyclical financial events such as inflation.  Inflation is explained by some conservative politicians and media as an unintended economic event that occurs mainly due to governmental actions around money supply.  Meanwhile, large corporations making billions in tax free profits, increase prices, send trillions of dollars to off-shore accounts and reduce employment in continuous business cycles which increase the business’ share of the money supply, manipulates Federal Reserve policy and devalues the US dollar.

Introduction

The arrival of the COVID19 pandemic to America has caused health hardships on many Americans.  Over the past couple of years, nearly a million people have died in America alone.  Many more have been sickened by the virus.  The number of sick patients exceeded the capacity of many American hospitals.   

We have also seen shortages of certain grocery supplies.  Many businesses have lost employees through sickness, death or resignation.  In response to the bad news related to the virus, the stock market has become very volatile with wide swings between gains and losses.  Some particularly susceptible industries, such as travel related ones, have lost business income and stock value.

At this time the health situation is getting better.  Although we have a new variant that is still infecting the unvaccinated, medical science has stepped up to develop and distribute enough working vaccines for all Americans which is protecting those who received them. The government stepped in to help people remain mostly capable of surviving, not only with rapid introduction of vaccines and other medicines to fight the disease, but also with monetary assistance to keep businesses and workers financially solvent.

However, in the middle of the pandemic, we began to see an increase in prices of many products.  Some of the increase was probably the result of price gouging for essential products and some may have been due to scarcity of products due to consumer fear and over-purchasing essential products.

Americans are now facing a seven percent rise in the price of all goods, which is the worst inflation in about 40 years.  

Economics theory has missed the mark about inflation in this new business climate.  Although some theories are still viable, they are the ones that have minimal impact on inflation.  What is very true of this era of capitalism is that business itself has become a major contributor to greed-based inflation.  I will discuss this and other economic theories and their degree of impact on inflation.

Economic theory indoctrination

At the outset, I must admit that I am not an economics expert and my understanding of the situations I describe comes from over thirty-years of experience in corporate management positions.

What I find disturbing in regard to economics theory are the explanations that I hear in the media for inflation.  Depending on the source, economics theory is often used to support a particular political view.  In those situations, it seems the speakers use economics theory as reassurance to those dealing with financial data that there is comprehendible logic in business activity and the blame for economic ills belongs with government.   

Some advocates seem to see economics theory’s foundation as accepting of all business activities, policies and ethics, regardless whether those activities, policies and ethics are beneficial or harmful to the economy as a whole.  However, economics theory isn’t an absolute or a required mathematical model that all businesses must follow.  Business is free to take whatever price related actions they think necessary to maintain profits.

Economics, as a subject, has had its share of partisan influence.   College business courses in the United States have been influenced through the donations of the Koch brothers’ foundation.  The Koch brothers have been able to attach strings to their contributions.  For example, they have been given control over curriculum at many schools.  Some say the selection of professors has been left to them. 

The Koch brothers have been instrumental in promoting and investing in laissez-faire deregulatory policies on business.  They promote a world-view that business is always right and it is the government and not business that threatens honest capitalism and individual freedom. The 1980 political platform of David Koch was full of anti-government propaganda which favored an unregulated business environment and urged the dissolution of many government agencies that protected consumers.  The platform is nearly identical to the modern day Republican platform.

The Koch’s have considered education a fundamental part of the strategy to manipulate public understanding of business.  Many of the business leaders coming out of today’s universities favor the Koch’s conservative political view.  They will adamantly defend what they have learned.

The focus area of this paper is inflation.  The definition of inflation escapes most lay-people, but in order to remove some of the mystery, I will call it price inflation.  Let’s examine the various factors that could cause price inflation.

Cost-push price inflation

Economics theory describes “cost-push price inflation” as resulting from supplier increases in the cost of supplied materials to a manufacturer.   These costs usually have a minimal or temporary impact on the price of the manufacturers goods.

It is almost never made clear to the public, the reason that the supplier increased prices.  It is important to note however that price inflation always starts with an increase in prices.

In the cost-push price inflation scenario, because raw materials cost increase, the profit of the manufacturer would decrease unless it took actions to protect that profit. The manufacturer could take any of a number of actions.  Their first action should not be increasing their prices.  

The manufacturer could change the cost to manufacture the finished product created from those raw materials.  Some manufacturers may try to negotiate price with the supplier or find cheaper alternative suppliers.  Some manufacturers may try to improve their manufacturing process to reduce costs. 

Some manufacturers may have no desire to find a consumer-friendly way to improve their product and retain profits, so they just pass the increased cost on to the consumer with a price increase on the saleable product.  Some manufacturers may pass on cost plus an additional amount to accommodate unforeseeable future supplier cost increases, or just to price gouge the public.

These are just some of the varied actions that different businesses could take.  The idea is that not all actions are the same and some may cause price inflation, while others may not.

If a product price increase deters consumers from buying the product, then other more drastic measures may be taken to retain profits at the original price point.  For example, some manufacturers may layoff some employees and increase the workload of those employees remaining.  Workers’ wages are a large part of the cost to manufacture and fewer employees means greater profit.

Alternatively, a company could layoff highly paid experienced workers and hire cheaper labor to reduce the manufacturing cost.  If practical, some companies could import cheaper foreign labor or shift assembly to other cheaper labor countries. 

Layoffs may resolve the short-term profit issues for the business but may have a devastating personal effect on the former employees, leading to other economic problems if the scale of layoffs across the country are large enough. 

Layoffs are an important tool which business uses not only to increase profits, but also to manipulate the Federal Reserve Banking system into supporting further increases in profits and resulting increase in businesses share of the money supply, as will be discussed later.

One should understand that the primary reason most businesses increase pricing is to protect or improve their profit margin.  There are no laws that control the price of a product, except in monopoly situations or when price fixing occurs between companies or in the occasional case of huge price gouging for essential medical products. 

My assumption is that most companies would like to improve their profit margins in the quickest and least costly way.  This probably leads most to simply pass pricing increases on to the consumer and is what fuels cost-push price inflation.  

Cost-push price inflation is a real thing.  As prices rise for the manufacturer, business management usually increase prices for the consumer.  But should the supplier or the manufacturers have done anything to stop price inflation?  A full-blown price inflation does not happen overnight or due to one manufacturer's price increases, so what are the mechanisms to stop full-blown inflation from happening?   

Because business doesn’t reliably find ways to prevent price inflation, (and quite the contrary, they are usually looking for ways to increase prices), it has made it necessary for the government to add those kinds of responsibilities to the Federal Reserve Banking system.  More about that later.

Demand-Pull Price Inflation

Economists describe “Demand-Pull” price inflation as being caused when consumer demand for products is so high that it reduces the availability of those products. Again, this type of inflation should be small and temporary.

When the supply of products is low but the product is highly desired by the consumer, the manufacturer may increase product prices before attempting to increase manufacture of those products.  If the demand remains high, the manufacturer may also increase pricing of other related products even if there is no shortage of those products.  The manufacturer’s profitability benefits from high prices in the Demand-Pull situation.  Their stock prices may also rise, making stockholders more prosperous.

This situation can easily be taken advantage of by companies that produce highly desirable products.  In this case, the company may be able to increase prices solely to improve their profit margins and not as a result of increases in cost of goods or anything that adversely affects their bottom line.   

Some companies such as those that produce consumer essential medicines or energy may raise prices at will without concern for loss of demand. Government intervention in price gouging for such products may still be a concern however some companies may risk the penalties and could be fined less than the profit made during the attempt.

If a company only has profit margin as motivation and can make products that are indispensable, essential and highly desired by consumers, then that company may be able to make sizable increases in pricing.   In that case other related products may also benefit and might be able to be over-priced as well. 

Supply and Demand

“Supply and demand” is  not a cause of inflation, but rather a theoretical relationship between the price of a product and the willingness to buy or sell it.  What lends itself to inflation insofar as supply and demand theory is concerned is the suggestion that any time demand increases, supply diminishes and therefore businesses must charge more for their products to retain their profits.  This is a questionable cause and effect.  

When the ordinary person speaks of supply and demand theory, the factor that usually isn’t considered is manufacturing capacity.  Capacity is basically the number of employees and machine resources that are available to meet increased demand. 

If a company has sufficient capacity, it can easily increase the production to accommodate the demand without a need for price increases.  Even if a company is at 100% capacity (and most are never that high), it has a choice to hire new employees or buy new machines to meet the demand. 

There may be a limit to what can be done immediately and during that interim period of limited capacity it may be acceptable to increase price to reduce demand.  Pricing could be returned to previous levels once sufficient capacity is available, but this hardly ever happens.

Business people should ask these questions in these circumstances: “Is a price increase necessary?” and “What is a fair price increase if necessary?”  Price increases cause price inflation and the decision to set a certain price is under the control of business.

Profiting on Consumer Fear

Occasionally, a major societal event may occur that initiates irrational or even rational fear in the consumer.  If a majority of consumers fear that products may become in short supply, they may be motivated to buy while the supply still exists.  This action may trigger a shortage of the product by excessive demand that exceeds replenishment capacity. 

In that situation, businesses that supply those products have a choice to make.  They can either increase capacity to meet the new demand or they can simply increase the price higher and higher while the shortage continues. They may even increase production but not release the product into the market while the consumer buying frenzy takes hold, thereby allowing them to make larger profits while they increase their pricing under the false implication that the shortage is real and out of their control.

Again, the increase in pricing is an inflationary choice by the business.

Change in money supply

This is one of the most misunderstood and abused explanations for inflation's causes. 

Conservative politicians and media often place blame or lead the consumer to believe that the Federal Reserve Banking system is responsible for starting price inflation by their control of the money supply and interest rates.

The Federal Reserve was created to maximize employment, stabilize prices, and moderate long-term interest rates.  The US Treasury prints the money in the United States and Federal Reserve Banks control the money supply by this and other means.  If the Federal Reserve wants to increase the money supply it can have the Treasury print more money or lower the required cash reserve ratio for member banks or purchase government securities in the open market.   

When the Fed increases money supply, they also tend to lower interest rates which can encourage business investments and consumer credit and spending.  The increase in consumer demand can lead to an increase in production and services.  The “Fed” usually increases money supply in response to financial data caused by business activity.

When the Fed wants to decrease the money supply it can sell bonds which causes the inflow of cash to be removed from the open market.  When the Fed decreases money supply, they also tend to increase interest rates.

When the business cycle and economy are in a state of rapid expansion, the Fed may attempt to reduce high prices and inflation, by increasing interest rates.  This amounts to controlling inflationary pressure caused by rapid price increases.  Importantly, the Fed's actions are a reaction to business activities causing inflation or unemployment.  The Fed's actions do not cause inflation or unemployment.   

Prices increase during rapid expansion periods because businesses take the chance that they can make larger profits for the time that demand is high.  Once the fed catches on to businesses actions, price inflation usually has already taken hold.  The fed's actions to increase interest rates and/or reduce money supply is done to influence businesses to reduce their prices because of the loss of demand that higher interest and lower money supply usually causes.  Businesses would not lower prices on their own and are in fact the cause of the price increases we call inflation.

In economic recession or depression, the Central Bank usually attempts to stimulate the economy by increasing money supply and decreasing interest rates.

Economic theory states if money supply increases faster than the goods and services being produced, it will cause or increase price inflation.  Conversely if the money supply does not increase enough, then it will lead to unemployment.  This appears to place blame for price inflation and unemployment on the Fed.  The conclusions proposed by these words are used broadly by partisan political groups to place blame on the government.

The partisan groups try to lead the public into believing that the Federal Reserve’s act of increasing money supply causes price inflation.  But price inflation is manifested by an increase in prices.  It is businesses and not the Fed that increase pricing.   In fact, the Fed’s actions during inflation is to reduce the money supply and not increase it, so the partisan view is contradictory to the Fed’s actual actions during inflation.

The Federal Reserve’s action to increase money supply is actually done in response to business actions that lay-off employees or cause an increase in unemployment.  It does not cause unemployment.

Let’s look at business actions during increased supply periods to help unravel some reason for money supply not increasing fast enough. 

When businesses increase production, they should be experiencing more demand. They should be utilizing more capacity, or making better use of existing capacity and making more profit by selling more.  It is not a time to layoff personnel.  So why should the money supply diminish (or not increase enough) during good economic times as stated in the money supply theory that causes unemployment?

If money supply diminishes during thriving economic times, it could be because much of that money is being removed from the US economy by businesses and C-level executives.  Once businesses share of the existing money supply goes into off-shore tax havens or purchases of foreign islands or property outside of the USA, or purchases of other non-money investments, that money is no longer counted as part of the existing money supply. 

It is estimated that over $11.3 trillion of the world money supply was stored in offshore accounts in the year 2020 and nearly $3 trillion of that was from American fortune 500 companies.  Compared to the $3 trillion removed from the money supply by business, the Fed increased the money supply in 2020 by $146.4 billion.  It's fairly clear that the impact of off-shore accounts on money supply outweighs the impact of the Fed's money supply actions. 

In that regard, it is likely that those with the biggest proportion of the money supply have control over the money supply numbers and can influence Federal Reserve actions by the actions they take concerning their money.

When business raises prices so much that it increases price inflation, the Federal Reserve decreases money supply.  Less money supply and high interest rates is expected to slow down price inflation caused by business during good economic times.  If the businesses decided to earn higher profits by increasing production or selling new products or services, rather than raising prices, price inflation would not rise.

Sometimes businesses use of layoffs manipulates the Fed into action.  They reduce their costs by laying off workers and making the remaining workers increase their work output. This started happening during the early 2000s with “off-shore” labor strategy in large businesses across America.  Americans by the thousands were laid-off from large businesses so that the business could increase profits by reducing employee costs and covering capacity needs with lesser paid foreign workers. 

This continues today.  In Trump’s first term in office over 300,000 American jobs were lost to “off-shoring”.  The Economic Policy Institute estimates that 700,000 jobs were lost to China in Trump’s first two years in office.  Trump’s 2018 tax law created new incentives to offshore jobs by reducing tax rates for off-shore profits.  In the past 20 years or so, it is likely that 10,000,000 or more Americans have become unemployed because of this strategy.

The labor reduction strategy used by large corporations also involves using the federal work visa program.  Businesses supposed need for the work Visa program is that there are no American workers capable of doing the jobs that they have open.  There are many and varied ways that the federal work visa program helps the rich eliminate high labor costs and is a favorite of large technology companies.

Employee lay-offs in large numbers make the Federal Reserve increase the money supply and reduce interest rates to support one of their main goals of reducing unemployment. 

Businesses know how the Federal Reserve responds to their actions.  As a result, businesses tend to repeat the cycle to increase business owner enrichment. 

Businesses increase their prices and this causes price inflation.  The Federal Reserve responds by decreasing money supply and increasing interest rates.  Businesses respond by moving their personal funds into off-shore banks and laying off American employees.  The Federal Reserve responds by increasing money supply and lowering interest rates.  When the money supply increases, businesses again raise their prices, making more money for less work and increasing the wealth gap between the poor and rich.  The inflated prices never return to their pre-inflationary value.

It is this repetitious cycle of price increases and layoffs initiated by businesses that manipulates the Federal Reserve to work in a way that benefits them. 

Prices never return to pre-inflationary values and causes the value of money for consumers to become less and less every cycle.  This devalued money does not cause harm to businesses because the revenue they are taking in is increased by the increase in product pricing and offsets the decreased buying power of the dollar.   

The consumer suffers from the devaluation of the dollar because unlike the business, they do not get more salary money for their labor to produce the inflated price products.  They must pay the inflated prices for products which means their cost of living has gone up.  Consumer/laborers become less able to provide for themselves and their families.

America will never again have a dollar with the buying power of a 1960 dollar.  The value of the dollar has decreased consistently over the years, making it even more apparent that this is a continuous and damaging economic cycle. 

 The following table gives a few examples of how inflation has affected consumer purchasing power.

Product	1960 value of $5000	2022 value of $5000
Gas/gallon	15,151 gallons	1,315 gallons
House	2.5 houses	0.014 houses
Car	2.5 cars	0.16 cars
Tuition	4 kids through college	0.09 of a kid through college

 It is what causes many in the workforce to require two jobs to make ends meet.  It is what makes married people both get jobs so they can raise a family.  It is what prevents many working-class people from ever getting positive cash flow.  It is what helps cause wealth inequality.

Wage-Price Spiral

Economics describes “wage-price spiral” situation where an increase in wages leads consumers to purchase more product thereby increasing demand which makes business increase prices and can lead to price inflation. 

Why does increased demand make businesses increase prices?  The increased demand amounts to increased sales revenue and more profit for business.  Even if the production capacity of the business is exceeded in this scenario, good business management knows how to increase capacity to meet the increased demand.  There is no good or ethical reason that business should increase prices in this situation. 

Some people may be thinking of the Supply and Demand curve of economics theory which they are taught makes price increases acceptable and necessary when demand increases.  But the increased demand has allowed the business to reach its profit targets sooner than planned.  Any additional sales are beneficial and can be accommodated provided the manufacturer focuses capacity towards making those high demand products. It is a bonus for business to have high demand products and not a bad thing.  Punishing the consumer or “shaking their pockets” for more money by increasing price is not necessary. 

The most likely reason that business does increase prices when demand increases is because they can.  Economic theories like the wage-price spiral and supply and demand make it seem that business has no choice or is legally obligated to increase prices when demand increases.  It seems to give them tacit approval to continue doing so.  That is not the intention of economics theory.

Some might say that business is taking a risk that might make them lose customer demand if the price is raised too high.  They may argue that the supply and demand curve attempts to explain this.  However, taking into consideration the benefit that high demand has on business profits, it is really just greed and the profit motive that brings some businesses to inflate prices in this situation.

Conclusions

Economics theory should not be viewed as a set of hard rules that all businesses must follow.  Every business owner has free will to set any price that they want and establish any profit margin they want.  The driving force of most businesses in America is increasing profits. 

The decisions of business owners are their own and not based on some economic theory that they are subject to.  That would be putting the cart before the horse, so to speak.  No business owner, one day realizes that there is price inflation and then increases prices.  (Well, maybe those who missed the earlier opportunity for price increases might.)  It is the price increase that causes and worsens price inflation and not the other way around. 

Capitalism is a good thing that has done much to provide technological improvements for society and provide affluence to many.  However, there is a need for business to consider more than just the race for profits.  For example, it should consider the worker as an important partner who should benefit when the business benefits and deserves respect and be valued by management. 

Business decisions should be made with concern for the impact they have on society as a whole.  Decisions that may increase wealth inequality, devalue money or increase inflation should be avoided.  The motivation for being in business should expand to more than just profiting.  Business needs to become smarter and more humane.   

Suggested Corrective Measures

Business itself is largely responsible for the condition of the economy at any point in time. 

Business regulations should be enacted to prevent the cycle of money devaluation and wealth inequality it causes.  For example, laws preventing increased pricing after Fed action to stimulate the economy should be enacted.  Prices should remain at previous levels for some period of time once the Fed action is undertaken. 

Government regulations should be created that require providing evidence that proves American businesses have searched adequately for American candidates for jobs offered by industries partaking in the Visa work program.

Businesses use of off-shore account tax havens should be investigated.

Government policies that favor off-shoring and relocation of businesses to foreign countries should be re-evaluated and prevented when it means loss of American jobs.

Businesses tendency to increase prices in high demand situations should be the subject of a Congressional investigation that results in regulations concerning acceptable and unacceptable business practices in that regard.  This is not to suggest that prices must be regulated by government, but rather to restrain pricing impulses during certain critical economic times.

Since the cycle of money devaluation is set in motion by actions of business and since the devaluation makes it more difficult for workers to support themselves, significant guaranteed recurring pay raises for all workers should be made law.  This is in addition to minimum wage laws.

Laws concerning business ethics should be established to provide guidance for business and punishment for businesses when bad business ethics violates the law.