The topic of inflation, after a long hiatus, is back in fashion. Current inflation is now being explained through two broad stories. The intent of this blog is to develop a third story, less visible in the blogosphere and in academia. There could be a fourth thesis, associated with rising inflation being caused by excessive wage increases, but there is zero evidence of this (so far), with the exception of a brisk increase in the average nominal wage in 2020, but this was caused by a composition effect, due to the huge decrease in employment in low-wage service industries.

The first story, made up of two story lines and which may be associated with hard-line mainstream economists, is that inflation today is mainly the result of the overly-generous support programs of the government during the course of the pandemic. Its twin story line is that these government deficits have been in large part financed by the central bank, thus leading to an excessive creation of money — an explanation that sounds like a return to monetarism. These twin story lines link current inflation to excess demand, due in part to a scarcity of supply arising from the COVID pandemic. The apparent difficulty of firms to find employees is given as evidence that the economy is running overly close to full employment and potential output, thus justifying the claim of excess demand and the recent restrictive actions of central banks.

The second story, which challenges this excess demand story, seems to be popular among heterodox economists, although it has also been accepted by some mainstream authors who blame industry concentration and imperfect competition. The story has two chapters. In the first chapter, the COVID pandemic and the war in Ukraine, with their detrimental effects on bottlenecks in the supply chains of manufacturing and on agricultural and energy prices, have given a rising impulse on price inflation. But there is a second chapter: this initial impulse has been followed by an additional effect that has sustained or amplified the inflation rate. This additional effect, either called profit inflation or seller’s inflation, is due to greedy firms with some market power taking advantage of the confusion amongst buyers and consumers arising from the distorted information provided by quickly rising prices, thus seizing the opportunity to raise their markup rates. The evidence is said to arise from the brisk increase in profits, the rising profit share in national income, and the higher profit margins observed among non-financial corporations, as first shown by Josh Bivens. Within the Monetary Policy Institute blog, profit inflation has been defended by Ilhan Dögüs for instance, while Isabella Weber and Evan Wasner have provided a detailed description of this second story.