Home Forum Political Economy Inflation is always and everywhere a redistributional phenomenon

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  • #247200

    Inflation is the average rate of change of individual money prices. In this narrow sense, Milton Friedman’s claim that inflation is always and everywhere a monetary phenomenon is correct. But underlying the average rate of inflation, individual prices change at different rates. And in this broader sense, inflation is always and everywhere a re-distributional phenomenon.

    The purpose of this thread is to invite evidence that puts this last proposition to the test.

    To kick-start this process, we shown in this chart two series: (1) the U.S. wholesale price inflation (which measures the average rate of change of prices charges by firms); and (2) the differential markup of the 500 largest firms in the U.S. (we defined the markup as the ratio of net profit to sales and the differential markup as the ratio of the top-500 markup and the business-sector markup).

    The correlation between the two series is positive throughout — meaning that wholesale price inflation has tended to redistribute profit, systematically, from smaller to larger firms.

    However, note that there is a marked change in the mid-1980s, when the correlation coefficient drops from +0.81 in the first period to +0.41 in the second. This drop suggests that inflation, although still redistributional, is now augmented by other factors, such as changes in wages, material costs, taxation, etc.

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    • #247201
      Scot Griffin
      • Topics started: 10
      • Total posts: 78

      There are two ways to increase differential markup: (1) reduce your costs, including your cost of capital, and (2) increase your prices.

      The mid-80s started a fundamental shift in Finance’s attitude towards the cost of captial/credit. We saw both the beginning of a reduction in the 10Y Treasury rate (which reduced the Fed Funds Rate and corporate costs of capital accordingly) and the rise of credit cards whose interest rates were not anchored by the Fed Funds Rate to expand the purchasing power of consumers without increasing their pay.

      I think the Werner paper I linked to in a previous post is very important to understanding the broader outlines and consequences of reducing the cost of capital on GDP. What’s missing is research on consequences of easy credit for consumers at high interest rates unconnected to corporate cost of capital.

    • #247202
      Blair Fix
      • Topics started: 4
      • Total posts: 62

      Thanks for updating this research, Jonathan. I wonder if you would be able to share the underlying data. Particularly the IRS historical data seems to be difficult to get, and I vaguely recall that you and Shimshon compiled it manually from old documents. It would be nice for researchers to have that data available in one place.

    • #247203
      Blair Fix
      • Topics started: 4
      • Total posts: 62

      Also, a question about methods. Could you clarify how you calculate the markup of the Compustat 500? Do you sum all profits (across companies) and divide by the sum of all sales? Or do you calculate the markup for each company, and then calculate the mean across companies?

      • #247207
        Jonathan Nitzan
        • Topics started: 27
        • Total posts: 147

        I wonder if you would be able to share the underlying data.

        Enclosed is our Excel data file for active corporations reported by the U.S. IRS. The file includes the number of corporations and their business receipts.

        Could you clarify how you calculate the markup of the Compustat 500?

        Regarding the profit markup for the Compustat 500 and the U.S. business sector: both are computed by dividing aggregate net profit for all firms in the group by aggregate sales for all firms in the group.

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    • #247211
      Blair Fix
      • Topics started: 4
      • Total posts: 62

      Much appreciated!

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