Prices rose fast over the past two years. In June 2022, year-over-year inflation hit a level we haven’t seen for 40 years—9.1%.
First the pandemic pushed up prices of DIY building supplies and durable goods. Then war in the Ukraine sent prices soaring for oil, gas and wheat. Then drought and chicken deaths from avian flu put upward pressure on food prices.
But there are signs that after these shocks, price increases are increasingly the result of pure profiteering. Big companies are taking advantage of the inflationary moment to jack up their prices well above their costs. Profits are at historic highs.
Today, prices are still going up, but not as fast as they were last summer. Wages are rising as well, but gains are uneven and aren’t keeping up with prices. Unemployment rates rose to 4% in December in the seven-county Portland metro area.
Despite that, federal inflation policy is actively working to increase unemployment and put the brakes on higher wages. Just as labor’s bargaining power was gaining strength at last, our public, central bank—the U.S. Federal Reserve Bank, often called The Fed—is doing its best to kill it. There are better ways to fight inflation.
What does the inflation rate really measure?
The surging cost of living is captured by the Consumer Price Index, or the CPI. The inflation rate you see reported is the average increase in the prices of things that consumers pay for, like groceries, gas and housing.
After peaking this summer, the national inflation rate fell to 6.5% for the 12 months ending in December, and to 6.7% in the metro areas on the West Coast.
Wages haven’t kept up with inflation, have they?
There’s been a lot of talk about rising wages, but pay hasn’t kept up with prices. “Real wages,” or wages adjusted for inflation, declined nearly 2% in purchasing power over the year from November 2021 to November 2022, and nearly 2% the year before.
But that’s just the average. Looking more carefully, more than half of workers lost ground between Spring 2021 and Spring 2022. People who fell behind typically lost more than 8% of their paycheck’s purchasing power.
And that doesn’t count the total loss of wages for 1.5 million women who haven’t returned to the workforce since the pandemic hit, given the ongoing challenges for school and child care. For those still in the labor force, more people missed work due to child care problems in October 2022 than at any earlier point in the pandemic!
Wages were too low even before the pandemic, right?
Wages and benefits, as a share of U.S. national income, fell dramatically during and after the Great Recession, bottoming out in 2010. Since then, labor’s share of the national income has been stuck at its lowest level for the past 70 years—less than 60%.
Some of the reasons are familiar. The federal minimum wage—which is the minimum in 20 states—is the sagging floor of the labor market; at $7.25, it’s worth barely over half the purchasing power of the federal minimum wage in 1968. Corporations have beaten back unions with impunity for decades now. And offshoring jobs has held wages and workers’ power down.
What’s giving business the power to hold down labor’s share?
A lot of industries are increasingly dominated by a few giant corporations, like oil & gas, prescription medicines, groceries, and airlines. When just a few big companies account for a lot of the sales in an industry, they charge higher prices, employ fewer people and invest less in the business. And in inflationary times, they can use rising prices as cover to hide the fact that they’re pushing prices up far beyond their own increased costs and then—like the oil companies—raking in a huge windfall.
Then why is the Fed acting to increase unemployment and restrain wage increases?
The Fed fights inflation by brute force, raising interest rates to slow business activity and throw people out of work, until business, consumer and local government spending falls enough to lower rates of inflation.
The Fed’s charged with maintaining (1) full employment and (2) inflation at an economically healthy level (2% to 4% a year). In reality, the Fed prioritizes low inflation over low unemployment. The Fed is run by bankers. Bankers make their living by lending money, and they hate inflation that they weren’t expecting. If they don’t see inflation coming in time to build it into the interest rates they charge, their loans are repaid with dollars that are worth less than the dollars they lent. In that way, inflation is bad for lenders but good for debtors such as homeowners paying off a mortgage and people paying off student loans.
Have the Fed’s efforts to stop inflation pushed the economy into recession before?
Baby boomers remember the terrible recession of 1982, engineered by Fed chairman Paul Volcker. Volcker cranked interest rates up to 20%, and we had what—at the time—was the worst recession since the Great Depression.
Boomers may also remember inflation peaking at nearly 15% in early 1980, and averaging above 10% for 1974, 1979, 1980 and 1981. Companies grew to expect high inflation, and regularly raised prices to stay ahead of the game—which then kept inflation going.
Wages were never the push factor. In inflationary times some unions were able to react to inflation, building into their contracts COLAs (cost-of-living adjustments) based on the previous year’s price increases. But there’s very little evidence for a “wage/price spiral,” in which high wages force companies to charge higher prices.
Aren’t there better ways to get inflation under control? Yes! And here are four of them.
We could pursue an incomes policy. In the 1980s, other countries used what economists call “incomes policies”—pulling together representatives of business and labor to negotiate moderated increases in prices and wages.
We could return to price controls. More drastic measures—wage and price controls—were in effect during World War II. President Richard Nixon also imposed a wage and price freeze for three months in 1971.
We could enforce our anti-trust laws—to break up big companies that now have the power to raise prices without worrying about losing business to their rivals.
We could claw back some of the corporate windfalls! For instance, Oregon Senator Ron Wyden has introduced a bill called the Taxing Big Oil Profiteers Act. It would double the tax rate on oil profits above 10%, and limit the use of corporate profits to buy back their stock, which mainly enriches executives and wealthy investors.
Mary King is an economics professor emerita at Portland State University and former president of the faculty union PSU-AAUP. She recently co-authored a U of O Labor Education and Research Center (LERC) report on the growing need for non-traditional hours in daycare.