Isabella Weber: ‘It’s time to cut rates’

She is perhaps the greatest emerging voice in the always fertile — and often neglected — field of economic heterodoxy. Isabella Weber was one of the first to blame much of the inflationary escalation of recent years on corporate margins, and today is calling on central banks to immediately lower rates. The Professor of Economics at the University of Massachusetts Amherst and research associate at Harvard’s Fairbank Center spoke to EL PAÍS by video call.

Question. How would you define the inflationary episode of recent years?

Answer. I would call it a seller’s inflation in the context of overlapping emergencies that have resulted in shocks to essential sectors like energy, shipping, food and raw materials. And these shocks created an impulse that was then propagated through the whole system via the pricing decisions of firms. Seller’s inflation is what basically generalized the local sectoral shocks into economy-wide inflation.

Q. In other words, instead of partially absorbing these specific price increases, they have passed on even high prices to consumers.

A. There has been some sort of coordinating mechanism: if firms in one sector all receive the same sector-wide cost shock, it is a clear signal that now is the time to hike prices. If they don’t hike prices, they might be penalized by the financial markets. Furthermore, if a company does hike prices, it can be sure that its competitors are doing the same, so it doesn’t have the same risk of losing market share. Just by protecting their margins, companies have managed to increase profits.

Q. Have companies protecting their profit margins, and not the cost of energy, been the main driver of inflation?

A. If we only had an energy price shock that was absorbed by firms, then we wouldn’t have had generalized inflation. What has created this generalized inflation has been the subsequent propagation of the initial shock. It has become clear that firms are the ones that are in the stronger position to protect themselves against this cost shock.

Q. In some sectors there have also been significant bottlenecks.

A. Yes, especially in the case of computer chips. And, when there is a bottleneck, there can be a form of temporary monopoly or quasi-monopoly power. When these situations last over time, you can raise prices in such a way that actually increase your profit margins rather than just protecting them. We have seen it in the context of commodities and the energy shock.

Q. Would you say it has been the biggest profit-led inflation crisis in history?

A. Generally speaking, in times of war, without price controls, there is usually inflation and higher business profits. It is something, almost by definition, derived from the very nature of these situations: it happened in World War I, in World War II...

Q. You mention price controls. On this occasion they have been limited to the energy sector, and not all countries have taken the step.

A. I think that governments could have been more ambitious: it took them months to realize that they had to act, until they saw that the rise in prices was going to end up ripping up the economy and society. Most countries took way too long to act because it was seen as economic madness to do any kind of unjustifiable price stabilization. I think this is a result of the neoliberal mindset.

Q. To what extent has this crisis highlighted the lack of competition in some sectors?

A. The extraordinary levels of concentration that we have in critical sectors like shipping, where eight companies control more than 80% of the global fleet, or like agricultural commodity trade, where a few companies control more than 70% of global trade. They have superior information and superior influence over the whole value chain, and they are companies that have made record profits in the last two years. In a situation of perfect competition, these price increases would also have occurred, but they have undoubtedly been increased by the power of these corporations. If they were subject to stricter regulation and greater transparency, it probably wouldn’t have been quite as extreme as what we have seen.

Q. In recent years, the term excuseflation has become popular. Would you agree with this term?

A. I think it brings up an important point in the relationship between firms and consumers: firms do care about whether price increases seem legitimate to customers. In a context of mega shocks, with everyone watching supply chain problems on television, consumers are more forgiving of these price increases, which they tend to see as legitimate. If you walk to the store and your pasta price has increased by 20%, and you have seen on TV the last three weeks that there’s a threat of a rain shortage because of the war in Ukraine, then you might go, “this makes sense.”

Q. We tend to accept it.

A. Many people experienced actual shortages in grocery stores for the first time in their lives in 2020. In this situation, we might also be more inclined to accept price increases. So I do think that there is something to excuseflation in the sense that the consumer mindset did change in the context of these shocks and emergencies.

Q. Much more attention has been paid to the risk of price and wage spirals than to the role of margins and corporate profits on inflation. Is this an ideological question, too?

A. Yes. But it must also be made clear that, since 2021, there has been an extraordinary shift in the debate. For decades, it’s been argued that there is no theoretical reason why inflation could not come from the profit side if it can come from the wage side.

Q. Have central banks gone too far in their response?

A. Yes. It’s time to cut rates. In the United States, the impact of tighter monetary policy has been compensated by very ambitious fiscal policy. But not in Europe: with the debt brake, Germany reverted to a very conservative fiscal stance, influenced by the same economists who in 2022 said that the energy price shock was not a big deal and that the economy can absorb it. The rate increases are being especially harmful for the Global South, which has experienced a double shock: due to the increase in the import prices of goods and due to the increase in the price of money. And that is something we don’t talk enough about at all. We have this strong recovery in the U.S. but if we take a more global view, the implications of the interest rate hikes are truly bad.

Q. The time has come, then, for both the Federal Reserve and the ECB to start lowering rates.

A. Yes, absolutely.

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