Blame monopolies for today's sky-high inflation, Boston Fed researchers say

Researchers at the Federal Reserve Bank of Boston said in a new paper that the decline of industry competition made the inflation crisis worse than it needed to be.

The US's industrial concentration problem is nothing new. The economy is at least 50% more concentrated than it was in 2005, according to a commonly used measure of industry concentration. A smaller group of companies control the majority of the sectors.

Higher input costs are passed on to consumers. It becomes 25 percentage points greater when there is an increase in concentration similar to the one observed since the beginning of this century. Companies raising prices at a faster pace because of decreasing industry competition.

According to the paper, the pass-through happens through a variety of channels. The team said that the rise in concentration has been a factor in cost shocks from supply shortages, energy price spikes, and the labor shortage.

Over the past several months, there have been three trends in the US economy. The global supply chain was disrupted in the year 2021, due to lock downs in China. The invasion of Ukraine by Russia boosted energy prices around the world. The labor market is the tightest it has been in decades, with job openings at record highs and companies still struggling to find available workers.

The economists said that the above-trend price increases don't last forever. When companies face cost shocks, they tend to pass them on to consumers over the next four quarters. One quarter after the cost shock, the fastest inflation arrives, according to the study. Over the next three quarters, the pace of price growth slows.

The research shows that another dynamic has allowed US inflation to recently hit its highest level since the 1980s. While factors like the labor shortage and rising energy prices are likely to lift inflation, companies are a critical junction between higher input costs and higher prices paid by Americans. Unless competition improves, the economy will be more susceptible to inflationary shocks in the future, according to research by the Boston Fed.