The Best Inflation Fighter? Competition
Here's the conventional wisdom on inflation: Companies have little pricing power. Global competition is so fierce that higher prices for raw materials, machinery, and even labor can't be passed on to consumers. Government statistics show that the core inflation rate (inflation minus energy and food), at 2.6%, is at a 30-year low--and they're probably overstating it.
Here's the problem: The "average" inflation rate is hiding a growing number of price increases. Check your cable bill lately? It's probably up. Phone bill? Ditto. Prices are rising faster than inflation for airline and rail tickets, medigap insurance, gas, drugs, medical care, and a host of other items. The runup in oil prices has something to do with the hike in transportation, gas, and heating oil prices--but not entirely. And energy costs have little to do with price rises in services.
The real culprit behind rising prices is market stickiness. Call it the failure to compete. Take telephone and cable prices. The Telecommunications Reform Act of 1996 deregulated cable prices as part of a larger package designed to boost overall competition by getting phone and cable companies to move into one another's markets. So where's the competition? The major players have shown little willingness to invest the billions to move into each other's markets, but they have aggressively raised their own prices.
Higher fuel costs certainly play a role in rising transportation tickets, but so do the dizzying consolidations in the airline and railroad industries. Four big railroads now control the market, and a few giant airlines increasingly dominate major urban markets. In medigap insurance, the growing number of seniors living longer is certainly a factor in driving rates up. But so is a shrinking number of companies offering the insurance. Medical costs are rising faster than inflation again. Why? It could be government mandates prohibiting one-day stays for birthing, but it could also be the roller derby of mergers and alliances among hospitals and managed-care operators.
Corporations have a legitimate argument in saying that in a global marketplace, size and scale improve competitiveness. Indeed, the very notion of competitive markets must be expanded to mean global, not merely domestic, markets. And it may very well be that down the road, the vast consolidations going on in telecom, transportation, banking, insurance, health care, software, and other industries will lead to greater competition. But we haven't seen much evidence of that yet, and consumers are beginning to pay the price.
Policymakers at the Federal Reserve Bank worry that inflation may reignite as wages move higher. Maybe they should also cast a concerned eye toward quasi-oligopolistic markets where prices are already moving higher because of the failure of competition.