I have called this inflation “sellers’ inflation,” because the pricing decisions of firms are key to understanding how price spikes in specific sectors were translated into general inflation. We have seen price spikes in systemically important upstream sectors like, for example, the energy sector, the shipping sector, and the raw materials sector.

The energy sector and the raw materials sector are basically commodity markets. In these markets, we have extremely volatile prices, prices that go up and down with supply and demand. For the rest of the economy, we have, for the most part, sectors that are dominated by large corporations that actively set prices. But even these large, powerful corporations do not increase prices if they cannot be sure that their competitors will do the same. Collusion and conspiracies are of course ways of coordinating price hikes. But our new research on corporate earnings calls shows that cost shocks can also coordinate price hikes in a more implicit way.

These price spikes at the beginning of the value chain in, most importantly, energy but also some other areas presented themselves as a cost shock to the rest of the corporate sector. If you know that your costs as well as your competitors’ costs are shooting up, then, as corporate price setters, you do not have to talk to one another to know that this is a moment to raise prices.

How are firms going to hike prices? They’re going to hike prices enough to at least protect their markups. If a firm protects its markup in response to a cost shock, this means an increase in profits. It’s like buying a cheap house and giving the real estate agent a 3 percent fee versus buying an expensive house and paying the same 3 percent fee. In one case, the broker gets a little; in the other case, he gets a lot. The same mechanism means that merely protecting markups provides an increase in profitability for corporations.

That’s an important point, because we have had this epic debate before, over whether failing to raise markups means there hasn’t been sellers inflation. No: sellers’ inflation says there are profit explosions at the beginning of the value chain, particularly in energy, grain trading, commodity trading, shipping, and other systemically significant sectors, and then across the economy — profits go up as markups are being protected. The flip side is that if the corporate sector as a whole manages to protect markups and increase profits, it’s pushing the costs of these shocks onto consumers, onto the working class, so that this inflation creates a redistribution from the bottom to the top.

Eventually workers will fight back, which is what we have seen. Eventually you get strikes; you get people asking for more money. But first, real wages decline and purchasing power declines. In fact, even though we have seen a catch-up on the wage side, the labor share in the economy is still down compared to where it was before inflation.

Without price coordination, powerful, price-setting corporations in command of the most efficient just-in-time production networks the world has seen do not respond to an increase in demand by increasing prices. If they did that, their competitors could ramp up their just-in-time supply, and they would risk losing market shares and hence undermining their profit outlook. So long as these global production networks are up and running, the way to increase profits is to cut costs through automation and by moving production to the places with the lowest labor and energy costs.

As a result, prices were pretty stable before the pandemic despite many rounds of quantitative easing and fiscal stimulus after the global financial crisis. Many economists thought these expansionary policies would bring inflation, but they did not. In the absence of massive cost shocks and supply constraints of the type we have experienced in recent years, the corporate giants did not lean into price hikes. Instead they expanded their market shares more and more, leaving us with enormous levels of corporate concentration.

When inflation eased, the costs of many inputs, like energy, raw materials, and transportation, started falling. Price-setting companies, however, did not lower their prices in response. As a result, profits went up in many sectors, and corporations won once more.

Back in 2021, there were two camps. There was Camp Transitory, and there was Camp Larry Summers.

Camp Larry Summers was saying we should never have had that amount of stimulus and we should now be hiking interest rates as fast and as hard as we can. If this approach had been followed on the fiscal side, we would not have had the recovery we’ve seen in terms of GDP growth, and we would not have had a strong labor market. Eventually the Fed did start aggressively hiking rates, but if rate hikes had come sooner, we would’ve seen even more negative impacts from them.

Larry Summers basically said, “We have to throw people out of work in order to deal with these inflationary pressures,” which is a total policy mismatch between the sellers’ inflation we were experiencing and the approach he was prescribing. This is because wage increases have been a response to sellers’ inflation — an outcome of inflation, not its cause.

The second camp was Camp Transitory, which said, “The price increases in energy and raw materials are local price spikes. Yes, the price index is going to go up, but it will come down eventually as these price spikes disappear. So we don’t have to worry too much; we just keep doing our stimulus.”

What I’ve been arguing for is a third camp. Like Camp Transitory, I never expected this to turn into a spiraling runaway inflation. I knew eventually this inflation would come down, unless we saw massive wage-bargaining victories of historic proportions, which was extremely unlikely given just how weak organized labor is today. But inflation eventually coming down is no reason not to be worried, because in the meantime people are squeezed in an extreme way through no fault of their own.

This has not just been an inflation in the sense of the general price level going up but an inflation that has seen the prices of essentials shooting up — food, housing, transportation, energy. People cannot say, “Thank you very much, professional economist, for telling me that in three years I will be able to afford these things again.” Because in the meantime, they have to eat; they have to shelter themselves and their families; they have to be able to get to work; they don’t want to freeze in their apartments. So I felt compelled to intervene in the debate and say, no, there is a third option. There is the option of trying to do something about the price explosions here and now, and doing something about the profit explosions that were the flip side of these price explosions.

The Democrats ultimately used a mix of all three camps, with much larger contributions from the first two. In terms of sectoral interventions, the Biden administration released oil from the Strategic Petroleum Reserve in an unprecedented way in 2022 to countervail oil price increases, and that was the right thing to do, but by itself it was not enough. Federal Trade Commission (FTC) chair Lina Khan spearheaded an antitrust revival, which was overdue and spot-on. But this will bear fruits only in the medium term.

Despite President Biden taking on some rhetoric about corporations being responsible for inflation, we have not seen forceful action. There has been no windfall profit tax and no federal price-gouging law, let alone more direct forms of emergency price controls for essentials like food and rent.

The price controls on Russian oil demonstrate that such policies can be designed even under a tight timeline. But the Biden administration did not dare to go up against its own fossil fuel industry, which made record profits off the war in Ukraine. As our new research shows, the US oil and gas profits in 2022 exceed all investments in renewables that year, and these profits are extremely unequally distributed.

I think there is. It shows in the increasing number of people experiencing food insecurity. We see people queuing up at food banks and the food banks being completely overwhelmed. The president of the Greater Boston Food Bank told me, “We have been set up to support people who temporarily came into trouble for whatever reason, but we cannot deal with the amount of demand we are seeing in this crisis, because we are not set up to be an inflation buffer for large numbers of low-wage earners.”

If we look at just these facts, we can see that wage convergence is not the full story. Wage convergence has been observed as lower real wages rose more than higher wages. That is good news, of course. But if we see at the same time that food insecurity is going up and homelessness is reaching record highs, real economic hardship is clearly on the rise, and something is missing. Real wages depend on how much money people make and by what inflation rate we discount that money wage.

If we focus on inflation as an index for the whole economy, we tend to forget that it does not impact everyone to the same extent and that not everyone experiences the same inflation rate. Many people spend all their income and more — they don’t save or rely on debt. For this lower-income group, the inflation index impacts all of their income. Other people can save a significant share of their income, and on this saved income, they get higher interest rates, or maybe they are even part of the asset-holding class and they benefit from the profit explosions. For this richer group, some of the inflation burden is offset by the appreciation of their assets. However, this isn’t the case for large parts of the working class.

Even if we leave this aside, people experience different rates of inflation. The composition of the consumption basket that we use when we construct the inflation index is supposed to be representative, but many people are far from the representative basket. The Bureau of Economic Analysis has put out a pilot study with income-specific consumer price indices. It’s still pretty crude, but even with a crude adjustment, we see that lower-income people have a much higher inflation burden.

If, beyond adjusting the consumption basket, we also look at different price changes that different people experience, the variation in inflation rates becomes even more pronounced. Let’s say you are a well-off person, and you buy your bread at a nice corner bakery that produces artisan sourdough that was just made in the morning. And let’s say that I’m a working-class person who buys bread in a big plastic bag from Walmart that comes out of a factory somewhere. The prices of my bread and your bread are not going to move in the same way. They are both breads, but they’re very different products with different prices. If we just use the price of bread as a stand-in, we miss this heterogeneity. If you used to buy artisan bread, you can always downgrade to supermarket bread when inflation hits. But if you already bought the cheapest kind of bread, there is no escape. You start at rock bottom on the price and quality ladder. If more people buy the cheaper varieties, those prices might also go up more, especially for essentials. This is what some have called “cheapflation.”

Another factor is discounts. Many people, especially working-class people, even before the pandemic would have been shopping for discounts; they would have bought whatever is discounted. Then discounts disappeared, so they might have suddenly had an inflation rate of 50 percent, because they had previously bought stuff that was discounted by 50 percent, and now they can’t.

Note that we haven’t even touched on a major issue: housing. If you bought a house and locked in your mortgage rate a couple of years ago, and you’re paying a low and stable rate of interest, and you got your house at a low price, your situation is very different than someone who is now trying to buy a house — when housing prices have gone up substantially and interest rates have gone up at the same time. People are priced out of even getting on the housing ladder, which means that rents have been going up even more in many places because people who would otherwise have been buying now crowd into the rental market. This means that if you are a tenant as opposed to a homeowner, even if you are in the same income group, you might have a much higher inflation burden. And the ways in which we measure housing inflation in the CPI are very flawed to begin with. I think this is something we have to pay attention to.

Together these effects can be quite significant, and we do not have a good handle on these vastly different inflation rates. So instead of economists saying, “It’s a vibecession, people don’t get it, they report hardship when they should be happy about a booming economy,” it would have been more honest to say, “We do not have good data analysis yet, and we are just starting to understand all the ways in which inflation creates inequalities.”

Absolutely. And although I hate Donald Trump as much as the next progressive person, he put his finger where it hurts when he suggested that he’s going to put a cap on credit card interest rates. If people depend on credit card debt to get by, their available cash flow is discounted by the credit card interest rate. This immediately affects their purchasing power; it immediately affects their standard of living.

First we have to acknowledge that when we start talking about price controls, we are typically already in a very ugly situation. Price controls are not a pretty measure — it’s not the kind of thing that people aspire to implement. When we’re at that point, we are in a very deep crisis. So when we assess the success or failure of price controls, we have to be very mindful of the context in which they’re being deployed.

In my book How China Escaped Shock Therapy: The Market Reform Debate, I have a whole chapter on Chinese hyperinflation and how price controls completely failed in trying to control it. The American economists who very successfully implemented price controls during World War II in the United States were flown to China to advise the Nationalists, who were trying to do the same type of price controls at the same time. It was a flat-out failure. The reason is twofold. First, it’s very difficult to do price controls if you already have runaway inflation. It’s also difficult to do price controls effectively if you have, as China did at the time, an agricultural economy with many small, independent producers and a disintegrated market. With Venezuela, it’s my understanding that many of the price control attempts were occurring in a hyperinflationary context.

The question is, of course, when do price controls work? There are basically two cases where they can work.

John Kenneth Galbraith was the czar of price controls in the United States during World War II — and by the way, this was probably the world’s most successful example of price controls. Galbraith had this line where he said, “It is relatively easy to fix prices that are already fixed.” If you have a small number of gigantic corporations that are basically already doing price fixing, because that’s how these markets work, then it’s relatively easy to deal with the handful of price fixers and work out a way to ensure prices are fixed in a stable fashion so that these companies don’t go bankrupt.

The second case is when you have commodity price explosions in your domestic market and these explosions are so large that you get historic windfall profits — this is the case of oil and gas in the United States. Then you can go in with a price ceiling and say, “You cannot sell oil at prices higher than X.” Of course, you have to navigate the international market, but that can be done. Many people were surprised that price caps on Russian oil worked relatively well. [Editors’ note: Sanctions imposed by the G7 capped purchases at $60 a barrel.]

There’s always some degree of evasion with price controls, just like with taxes. We continue to use taxes even though there’s a horrendous amount of tax evasion. It’s the same with price controls: they’re never going to be perfect, but they do work to a considerable extent.

We put a price ceiling on Russian oil. I don’t see why we couldn’t have also put a price ceiling on American oil and thereby effectively lowered oil’s international price. The dirty secret of price controls is that if you limit the windfall profits that are the flip side of price explosions, you give companies more incentive to produce, because they can no longer profit from keeping volume low. The only way for them to increase profits is by producing more stuff, because the profit per unit of output is now fixed. Oil companies boasted on earnings calls that they were in no rush to fill the oil supply gap while they benefited from record margins. This would not have been the case under price controls.

Another point I want to make is something that Galbraith hammered home whenever he talked about price controls: price controls buy time, no more and no less. You cannot implement a price control in a time of severe shortage and then say, “Okay, I’ve done the job, end of story.” The price control will break sooner or later. But you can apply a price control so that a price doesn’t completely overshoot, and then meanwhile do whatever you can to address the actual shortage.

Sometimes you don’t need a price increase to resolve a shortage. Let’s say there is a massive traffic jam at the Port of Los Angeles, as in fact occurred during the pandemic. It will take a certain amount of time to get the port unblocked, and if prices explode in the meantime, it won’t unblock the port any faster. But even if you prevent prices from going up excessively, you still have to make sure the port gets unblocked.

Price controls are emergency measures. They’re like a bandage that you put on right after an injury to stop the blood, but more measures are often needed for healing. Nevertheless, bandages are useful things to have around.

First, we have seen in pretty much every poll for more than a year that inflation is the number-one concern for voters. And when you ask people what causes inflation, the vast majority say that it’s corporations’ power and price-setting and profiteering. This has been a clear sentiment.

So Harris coming out with a price-gouging proposal on food as her first economic policy announcement was a smart move. I think it was the right thing to do. I’m not saying she couldn’t have done more, but in terms of the first thing to drop, it was the right thing. It came at a point when she was very popular and it aided her popularity; it certainly did not undermine it.

At the time, what she proposed in terms of price-gouging legislation was very vague, so it’s hard to say what it would have amounted to in detail. It’s clear it would have focused on the food sector, which I think is the right one. We need to focus on more than one sector — we need to look at the whole basket of essentials — but if you had to pick only one, it’s electorally smart to pick food.

Price-gouging legislation is different from a direct price control in the sense that it’s not actually telling companies they can only charge X price or they have to charge the same price they charged on Y date. But it is telling companies that if they raise their prices by more than what is justified by cost increases, consumers can complain, and the company might be charged for price gouging. It basically gives consumers the power to take the case to state law and state attorneys and present the evidence they have, and then there are legal consequences.

Harris was proposing to take that law to the federal level, which makes sense, because we have some very large companies like Kroger that operate nationally, and we shouldn’t only charge them on the state level when they price gouge across the country.

The logic is sound. However, James K. Galbraith and I were possibly the only economists to write an op-ed supporting her call for price-gouging legislation. It was very depressing that hardly any economists came out in support of it, because it seemed that after three years of debate around inflation, the economics punditry rehashed the same old Econ 101 argument on price controls that was thrown at me in response to my Guardian op-ed, to the point that the backlash contributed to Harris being muted.

Of course, evidence came out that she also received a lot of pushback from certain corporate elites. And she had a lot of public pushback from corporate lobbyists not to renew Khan as FTC chair. As unfortunately happens too often, the old unholy alliance of capital interests and crude neoclassical economics were critical in preventing her from centering price gouging.

There is a strong preference on the part of neoliberal economics to rely on cash transfers over price interventions. If you do cash transfers, then some people just have more money in their pockets to pay the exploded prices. The allegedly rational pricing prevails, and the market can do all its wonderful things in the same rational ways that are assumed. You aren’t meddling with the market in the same way you would if you did something about prices.

But the key here is that you assume this price to be rational. Tom Krebs and I have a paper on that called “Can Price Controls Be Optimal?” We use a general equilibrium model — which is at the core of neoclassical economics — to show that even within that framework, you can conclude that price controls are optimal when prices are not rational, when they overshoot. So you really have to be a neoliberal to rule out price controls; it’s not enough to be a neoclassical economist.

In situations like summer 2022, when the global prices of gas depended on what Vladimir Putin had for breakfast and how the EU commissioner and the White House felt about it, it’s absurd to me to assume that these are rational prices in an economic sense. It’s clear that you get herd behavior in this kind of situation. You get the same kind of behavior you have with bank runs: panic and panic-induced overshooting of prices. That’s why I think there’s an obvious case for doing something to stabilize these prices, even for a neoclassical economist. This is theoretical but a really important point.

Price policy used to be part of the mixed economies of the twentieth century and certainly of New Deal economics. But it was not brought back as part of Bidenomics beyond the mobilization of the Strategic Petroleum Reserve.

The second point I’d make, to the broader question, is that you cannot do large-scale industrial policy without paying attention to prices, and that any country in history, to my knowledge, that has successfully done industrial policy has had a price policy in the mix. Alice Amsden, in her famous work on the Korean case, went so far as to say that it’s all about getting prices wrong. If you try to change the structure of an economy with massive state programs — as I think we should, because that’s what we need to do to accomplish the green transition and not have the planet burn — you also need to look at the price side. And there has been an enormous reluctance to do that. There was an idea that you could do all these wonderful green industrial policy things without having to touch the holy grail of prices directly.

That price policy is the missing piece, and this is the big lesson we’ve now learned once more. In a strange way, it reminds me of World War I versus World War II. In World War I, you had all the wartime spending and all the wartime mobilization, but economists were extremely reluctant to implement price controls. Price controls came late, they were unsystematic, and they were not as effective as they could have been. The big lesson for the New Deal and World War II was that you needed price controls for that scale of mobilization.

I’m not saying that the Inflation Reduction Act (IRA) comes anywhere near what we saw in World War II in terms of state mobilization of resources. I’m also not saying we should have total price controls of the kind we saw during World War II. But I am saying that you have to systematically think about the price dimension when you try to rebuild your economy.

All that being said, I think the idea that the IRA and Bidenomics investment programs are behind this inflation is mistaken. It’s clear that a lot of the investment is just about to come online. That’s why people have been complaining about the job market numbers not looking fantastic yet. It takes time for these investment programs to take off. In that sense, I absolutely do not think this inflation has been induced by the IRA.

But looking forward, I think the big lesson here is that we can’t just pick up half of the industrial policy. We have to look at the whole package and see industrial policy as part of macroeconomic management, and there has to be coherence between the price and sectoral intervention policies.

I’m very much convinced that we have to work on the upstream sectors. That’s why I’ve been doing all this work on systemically significant prices using input-output modeling; that’s why I’m emphasizing the importance of initial price shocks in these upstream sectors in unleashing inflation.

At the same time, it’s not enough as a progressive economist to only focus on the upstream stuff, because that’s very far removed from the everyday experience of the working class and the majority of people. I think this is exactly where Bidenomics fell flat. It was very progressive — it was ahead of Europe, for example, in terms of its upstream, new industrial policy initiatives — but it just did not do enough for the stuff that people feel immediately.

Ironically, one of the lines of Biden’s that I rather like is when he explicitly went after trickle-down economics. He basically announced the end of trickle-down economics, which, looking at how the economic policy discourse is going in Germany, is a pretty big step forward. But if you do Bidenomics in a way where it’s all about the upstream stuff — you rebuild infrastructure, you rebuild industries, and then you have some union jobs and some demand trickle down from that — it ends up being a new version of trickle-down economics, where the trickle down doesn’t come simply from free-market movement but from state investment initiatives.

It’s also not directly thinking about the needs of the people. What are the people’s concerns? What hardships are people going through in the middle of one of the worst crises the world has seen in decades, and how can we directly address these hardships? How can we make sure the cost-of-living crisis is not crushing the lives of millions of people? Build Back Better had a lot of that human-needs-oriented thinking. But it was dropped on the way to the IRA.