The causes of post-pandemic inflationary episode have been widely discussed. And no wonder: this strong increase in the pace of price growth around the world marked a significant change in trend after years of macroeconomic stability with controlled inflation and low interest rates.
To understand the reasons for inflation after covid-19, it is necessary to remember what was experienced as a result of the health emergency. To contain the spread of the virus, countries resorted to mandatory confinements that prevented economic activity from continuing to develop normally. As a result, global production, transportation and logistics chains were dramatically affected..
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In addition to this forceful supply shock, the recovery of the economies in the post-pandemic period was accompanied by significant monetary and fiscal stimulus. The reaction of governments was to increase their fiscal deficit, both to meet public health needs and to assist the population in the face of the contraction of activity and employment. For their part, central banks implemented an expansive monetary policy through interest rate reductions and balance sheet expansions to support the reactivation..
Inflation in the United States
Under these circumstances, inflation grew rapidly due to the confluence of supply, demand and public policy factors. However, some economists have suggested that the main reason for this outcome was the behavior of the firms. According to this reasoning, firms increased prices across the board and in greater proportion to their costs, taking advantage of the inflationary situation and their market power to increase their profit margins.
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To inform the discussion about the relevance of this narrative for Colombia, we present graphs and analyzes that provide an idea of the evolution of the profit margins of companies in the country during the period analyzed. In a simple way, these correspond to the difference between production costs and sales prices, which can be approximated through the difference between the producer price index (PPI) and the consumer price index (CPI).
To control for differences in the composition of the PPI and CPI baskets (goods and services consumed by households vs. goods consumed by firms), the following graphs show the annual variations in the prices of some homogenized subbaskets. That is to say, Baskets are constructed with the items common to the two indices and their evolution in recent years is compared..
Inflation
Chart 2 refers to the broader basket of goods that are part of the two indices, excluding fuels. It is evident that at the beginning of the pandemic, producer inflation remained relatively constant, while consumer inflation fell. Subsequently, both indices grew markedly but, until August 2022, producer inflation was higher than consumer inflation. From that date on, consumer inflation increased more than producer inflation, reaching its peak of 22% in December 2022, and then fell, although more slowly than producer inflation..
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In 2024, the indices were already growing by similar magnitudes. This evolution could indicate that, during the first stage of the pandemic, companies did not pass on the increase in costs to consumers at the expense of their profit marginsbut that the opposite occurred in a second stage of the post-pandemic when companies transferred costs completely to recover lost margins.
A review of specific subbaskets following this methodology shows somewhat broader divergences. In the case of goods, as seen in graph 3, it is highlighted that the increase in the CPI considerably exceeded the increase in the PPI since March 2022. In contrast, in the case of food, the increase in the PPI was greater than that of the CPI between October 2020 and February 2023, date from which they grew at similar rates.
Inflation
These data would seem to indicate that, in the case of goods, firms initially lost profit margin, but were able to (more than) recover it later. Instead, In food, producers seem to have not been able to recover the margin they lost during 2021 and 2022.
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The previous analysis shows possible changes in the profit margins of companies in recent years. Although there have been periods of growth, these have been preceded and succeeded by periods of decline. It is worth asking if these changes are due to variations in the market power of the firms that lead them to continually adjust their margins or ifRather, they reflect the same economic cycles that lead to periods of expansion and contraction of the economy. Faced with cyclical changes in demand and a relatively rigid supply, it is normal for prices and profits to change; In fact, it is these same changes that largely encourage the entry and exit of firms and keep the market competitive.
It goes without saying that greater competition will always be welcome, for which other public power bodies must work. The monetary authority, for its part, must continue to act in the face of inflationary pressures of a different nature. to ensure compliance with its objectives of price stability and sustainable growth. Even if inflation originates from supply shocks or even if it were associated with a dominant position of firms in the market (although this does not seem to be the case), the reaction of monetary policy must be forceful to ensure that inflation expectations They remain anchored to their goal.
(BIBIANA TABOADA ARANGO and MAURICIO VILLAMIZAR VILLEGAS
Co-directors of the Bank of the Republic.
*The opinions in this text do not commit Banco de la República or its Board of Directors.
A longer version of this article at: https://www.banrep.gov.co/sites/default/files/publicaciones/archivos/nota-mitos-empresas-causantes-
inflation.pdf
