The Fed’s Inflation Mistake Continues

Script and Sources

Get ready, folks. The war on inflation is about to get ugly.

The Federal Reserve has been hellbent on continuing to raise interest rates to slow the economy.

This is a huge mistake.

You know who will bear most of the pain of the Fed’s policy? 

Not powerful corporations that are ratcheting up prices to pad their profit margins. Not corporate executives, not Wall Street, not the wealthy and not the upper-middle class. 

Most of the pain will be borne by lower-wage workers and the poor. 

Researchers at the IMF estimate that the unemployment rate may need to reach 7.5% — double its current level — to end America’s inflation crisis. This would be about 6 million job losses. 

And low-wage working people will take it on the chin because they’re usually the first to be fired.

Right now the Fed is wrongly obsessing about a “wage-price” spiral — wage gains pushing up prices — when it should be worried about a profit-price spiral — corporate profits driving up prices. 

Wages are going nowhere when you adjust them for inflation. Take a look:

[CHART - Reuters Source]

As the Fed continues to slow the economy, workers are even less likely to get wage gains that approach inflation. 

You know what’s really driving inflation? Not wages. 

Not government spending — Republicans are dead wrong when they claim the American Rescue Plan is a main driver of current inflation; families are no longer receiving that money — plus it was necessary to help them stay afloat for part of the pandemic.

The real driver is monopolistic corporations hiking prices to maximize profits. As a share of the economy, U.S. corporate profit margins in the second quarter of 2022 rose to their highest level since 1950.

[CHART]

So there you have it, folks: Profits up. Wages down. 

Yet the onus for controlling inflation is falling entirely on the Fed’s blunt instrument of job-sapping and recession-driving higher interest rates. 

That’s because interest-rate hikes are the only tool in the Fed’s tool kit. As the old saying goes, when you only have a hammer, everything looks like an interest rate. 

But this hammer does nothing to address a key piece of the inflation puzzle — corporations increasing their profit margins — and will cause needless suffering for millions of people who are already struggling to keep the lights on.

Instead of raising interest rates and slowing the economy toward a recession, Congress and the Biden administration should be taking aim at corporate price gouging.

How? With a windfall profits tax. 

Bolder antitrust enforcement.

And temporary price controls.

Know the truth — and urge Congress and President Biden to put the burden of inflation where it belongs; on price-gouging corporations, not everyday working people.