What is really fueling today’s inflation? However, not free monetary policy. The number of economists, and therefore politicians, who cling to the idea that inflation is the result of too loose monetary policy—that is why central banks should cut the money supply and raise interest rates—is overwhelming. And this is another mistake, as the causes of inflation vary by context and period. Tightening monetary policy is a crude tool that risks causing recession and unemployment, hurting workers even more than rising prices. And if the cause of inflation is something else, then reducing the excess demand that should be responsible will not even solve the problem.

These obvious facts seem almost forgotten in the public debate, and even the economist Olivier Blancart has suggested that rising unemployment is the only way to control inflation. Leaving aside the highly problematic claim that “unemployment must rise to control inflation,” which has been effectively debunked over the past two decades. Just consider the possibility that the driving force behind rising prices is not “excess demand” or workers demanding higher wages, but corporate profits, along with speculation in commodity markets.

There is good reason to believe that this is indeed the case, especially in global markets and in advanced economies. For example, in the United States, the Economic Policy Institute found that rising corporate profits contributed disproportionately to inflation. From the second quarter of 2020 to the last quarter of 2021, corporate profits were responsible for 54% of headline inflation, significantly more than the 11% they accounted for in the previous four decades (1979-2019). By contrast, unit labor costs were responsible for less than 8% of inflation, compared to 62% over the previous 40 years. The contribution of non-labor inputs, the much publicized and famous “supply chain problems”, was 38% compared to 27% in the previous period.

The ability of companies to increase profit margins can itself be associated with an increase in demand. However, the increased concentration and monopoly power in business played a much greater role. The strong growth in corporate profits was most noticeable in energy, food and pharmaceuticals, as supply shortages due to the war in Ukraine provided a convenient excuse for disproportionate price increases.

* Ms. Jayati Gos is Professor of Economics at the University of Massachusetts Amherst. The article was published on the website of the Friedrich Ebert Institute.