Today, inflation is the key economic concern for most Americans. That’s especially true for lower-income households and communities of color, who spend a greater proportion of their budgets on basic necessities like rent, gas, and food. Economists have proposed and debated three explanations for why inflation has been so high—changes in demand, supply, and market power—yet how to understand and respond to inflation is still in question.
A new Roosevelt Institute brief, “Prices, Profits, and Power: An Analysis of 2021 Firm-Level Markups,” finds that markups (essentially the difference between sales and marginal costs) and profits, both before and after taxes, skyrocketed in 2021 to their highest recorded level since the 1950s. Further, firms in the US increased their markups in 2021 at the fastest annual pace since 1955, especially at the very top of the distribution.
Co-authored by Mike Konczal (director, macroeconomic analysis) and Niko Lusiani, (director, corporate power), the brief concludes that the evidence of this unusually and suddenly high jump in markups fits all of the three main stories of inflation being debated—that inflation is related to changes in demand, supply, and market power. This is because:
- the broad markup increases point to a demand side of the story;
- a historically unique industry-specific movement of markups points to a supply story; and
- pre-pandemic markups are associated with an increase in markups during 2021, an indication that market power is at play.
Insight from the authors
“We found that a 10 percent increase in size-adjusted pre-pandemic markups is associated with a 1.6 to 2.7 percent increase in 2021. Markups this high mean there is room for reversing them with little economic harm and likely societal benefit. To tackle inflation, we need an all-of-the-above administrative and legislative approach that includes demand, supply, and market power interventions,” said Konczal.
“How high companies can increase their sales up and above their costs also matters for the economy more generally because these markups distribute economic gains from workers and consumers to firms and shareholders. This is especially the case when almost 100 percent of these firms’ earnings derived from markups are distributed upward to shareholders rather than retained and reinvested,” said Lusiani. “Making corporations once again price-takers rather than price-makers will help bring down prices, and in time lead to a more equitable, innovative economy.”