The debate over whether inflation is a macroeconomic or micro economic problem has been raging for decades. Some economists say that the aggregate impact of inflation on an economy cannot be compared to what happens in specific markets, while others argue that it can, and do so regularly. The question raises many interesting questions about how best to measure the cost of living and wage growth across economies

The “minty bets” is a bet that the U.S. Federal Reserve will raise interest rates. The candidate, Joe Biden, is betting on inflation as the reason to raise interest rates.

Is Inflation a Microeconomic Problem? That’s What Biden’s Competition Push Is Betting

On Wall Street, there’s a saying that the stock market is actually a market of stocks: a collection of many different components that frequently move to their own rhythm.

The consumer-price index, on the other hand, is a price index. Inflation is caused by both macroeconomics (when overall expenditure exceeds the economy’s ability to produce goods and services) and idiosyncratic behavior in one sector or another (microeconomics).

The most important economic issue now is whether inflation hit 7% in December, the highest since 1982, as a result of macroeconomics or microeconomics. Some Democrats have recently relied heavily on the microeconomic explanation while also adding a moralistic layer.

“Market concentration has enabled huge firms to hide behind claims of increasing costs to fatten their profit margins,” Massachusetts Senator Elizabeth Warren said Tuesday during a hearing on Federal Reserve Chairman Jerome Powell’s nomination for a second term. President Biden attributed the spike in meat costs on consolidation in the meatpacking business last week. He announced steps to increase independent meat processing, saying, “These firms may utilize their position as intermediaries to overcharge grocery shops and, ultimately, families.”

Some opponents allege that firms become more greedy or consolidated in the previous two years, although White House officials deny this. Instead, they suggest that because of the well-documented, decades-long trend toward consolidation, corporations might hike prices even higher in the event of a pandemic, disrupting supplies.

In textbook models, monopolistic businesses have greater prices and profits than competitive ones. They are less certain if prices grow quicker and hence contribute to inflation in such circumstances. According to economists Steven Salop of Georgetown University and Fiona Scott Morton of Yale University, it is theoretically plausible. “If scale efficiencies lead to mergers and accompanying plant or logistical consolidation for each business,” they wrote in a 2020 study, “then the risk of disruption—e.g., disease, earthquake, or nuclear power plant meltdown—will lead to a bigger cost and price effect than if there is more variety.”

According to a White House official, demand for beef, poultry, and eggs has increased as a result of the epidemic, but prices for beef and poultry have risen more than eggs because “eggs are a lot less concentrated industry.” He cited a cyberattack on meatpacker JBS SA last year, which knocked down a substantial portion of the country’s meat supply, as “evidence of the risk of concentration.” (Meat and poultry processors face the same difficulties as the rest of the economy, according to the North American Meat Institute: rising energy prices, labor shortages, and transportation issues.)

Is-Inflation-a-Microeconomic-Problem-Thats-What-Bidens-Competition-Push

On Tuesday, pre-owned autos were for sale at a dealership in Detroit.

Bloomberg News/Bloomberg News/Matthew Hatcher

Officials at the White House claim that the role of concentration to inflation is modest. They don’t blame increasing automobile costs on a lack of competition, for example. They oppose price regulations, as advocated by those on the left. They have recognized the independence of the Federal Reserve.

They also don’t believe that inflation has grown primarily as a result of excessive demand, spurred in part by Vice President Biden’s $1.9 trillion American Rescue Plan, and that the only way to remedy the problem is to tighten monetary or fiscal policy.

“If automobile costs are too high right now, there are two options: boost car supply by building more cars, or lower demand by making Americans poorer,” Mr. Biden said last week. “The second camp has a lot of individuals… It is unacceptable to me.”

Jerome Powell said the Federal Reserve will utilize its instruments to tame inflation at his confirmation hearing for his second term as chairman. Graeme Jennings/Press Pool photo

As a result, administration officials claim they are attacking the macroeconomics of inflation from the supply side, rather than the demand side, by addressing bottlenecks at ports, increasing the number of truckers, and asking Congress to provide affordable child care and preschool to enable more parents to work. Officials in the government claim that his long-standing call for stricter competition enforcement is complementary to the battle against inflation. Mr. Biden’s Council of Economic Advisers member Jared Bernstein remarked, “You have middle-class people suffering genuine strain.” “Here’s our toolkit,” the president says. Let’s make the most of it and do whatever we can to assist these families.”

LET US KNOW WHAT YOU’RE CONCERNED ABOUT.

Higher interest rates or pro-competition measures from the White House are more successful in controlling inflation. Participate in the discussion below.

The White House’s quest for increased supply and competition to lower costs makes economic sense. However, as an anti-inflation approach, it is unlikely to succeed. Many of these projects are insufficiently large and will take too long to affect inflation. It might take years to significantly increase the supply of meatpackers and trucks. The White House’s attempts to lessen the backlog at West Coast ports have yet to yield results.

Worse, the emphasis on industry-level solutions is omitting something crucial. Individual prices, like individual stocks, nearly always represent a combination of idiosyncratic and larger variables. Even if supply-chain disruptions subside, there is enough evidence that inflation is being influenced by other, larger influences. The median price rise in the CPI, calculated by the Federal Reserve Bank of Cleveland to remove any goods with large price changes, was 3.8 percent in December, the most in 30 years.

Meanwhile, a surge in demand for employees, along with a labor pool cut by retirements and Covid-19, drove unemployment down to 3.9 percent in December. As a consequence, there are near-record vacancies and quick pay increases, which, although good for workers, may prevent inflation from returning to the Fed’s aim of 2%.

President Lyndon B. Johnson regarded inflation as a microeconomic issue in the late 1960s, and he opposed tougher monetary and fiscal policies. Higher inflation became entrenched as consumers and businesses adjusted their pay and price-setting behavior. There are many changes between today and then, but it is useful to remember the commonalities.

Greg Ip can be reached at [email protected]

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