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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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