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

• Dwindling industrial competition has made the US's inflation problem even worse, Fed researchers said.
• A new paper found that increased concentration led firms to pass a greater share of cost shocks onto consumers.

The decades-long decline of industry competition made today's inflation crisis much worse than it needed to be, researchers at the Federal Reserve Bank of Boston said in a new paper.

The US's industrial concentration problem isn't anything new. The economy is at least 50% more concentrated now than it was in 2005, according to the Herfindahl-Hirschman Index, a commonly used measure of industry concentration. That means a smaller group of companies control the lion's share of their respective sectors.

Companies typically pass higher input costs on to consumer prices. Yet that pass-through "becomes about 25 percentage points greater when there is an increase in concentration similar to the one observed since the beginning of this century," Fed economists Falk Bräuning, José L. Fillat, and Gustavo Joaquim said. Put simply, dwindling industry competition leads to companies raising prices at a much faster pace.

The pass-through happens through a variety of channels, according to the paper. The rise in concentration over the past two decades has been an "amplifying factor" to cost shocks from supply shortages, energy price spikes, and the labor shortage, the team said.

All three trends have been rife in the US economy over the past several months. Lockdowns in China roiled the global supply chain in 2021, and rising coronavirus case counts in Beijing threaten to repeat that cycle. Russia's invasion of Ukraine boosted energy prices around the world. And the labor market is the tightest it's been in decades, with job openings at record highs and companies still struggling to find available workers.

Encouragingly, the above-trend price increases don't last forever, the economists said. When companies face cost shocks, they tend to pass those on to consumers over the next four quarters before returning to a more typical inflation trend. The fastest inflation typically arrives one quarter after the cost shock, according to the study. The pace of price growth then slows over the next three quarters.

Still, the research details yet another dynamic that's allowed US inflation to recently hit its highest level since the 1980s. While factors like the labor shortage and rising energy prices are practically guaranteed to lift inflation, companies represent a critical junction between higher input costs and higher prices paid by Americans. The Boston Fed's research signals that, unless competition rebounds, the economy will be even more susceptible to inflationary shocks in the future.