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Odd Lots Newsletter: Inflation Expectations Are the Whole Game

Welcome to the subscriber-only Odd Lots newsletter. Every week, Joe Weisenthal and Tracy Alloway bring you their thoughts on the most interesting developments in markets, finance and economics.  

I made an offhand remark to Joe in one of our episodes earlier this year.

“One of the things that the Fed might have gotten right in recent years is its point about monopsony and big companies and pricing power,” I said.

Monopsony emerged as a hot topic in 2018 at Jackson Hole, the annual meeting of central bankers and policymakers. Back then, the big question was why inflation, wages and economic growth had remained so sluggish.

Part of the dynamic, as posited by the late great Alan Krueger, might be explained through the rise of “superstar” firms like Amazon, Alphabet and Apple. Such firms had enormous pricing power in the labor market, he argued, making them “wage setters” instead of “wage takers.”

Fast forward to today and the Fed is facing a different question. Why is inflation so high and what can be done to stop it? While much of the focus has been on whether higher prices are driven by rampant demand or supply shortages, monopsony might provide some insights here too. 

A new paper, from Mike Konczal and Niko Lusiani at the Roosevelt Institute, uses thousands of financial accounts collected from firms between 1955 and 2021 to explore the factors leading companies to raise prices, attempting to disentangle supply, demand and “corporate greed” — or the idea that companies which can raise prices are doing so.