New paper finds monopolies contribute to inflation

High levels of corporate concentration — where just a few companies make up an entire industry — contribute to inflation, finds a new paper from economists at the Federal Reserve Bank of Boston.

Why it matters: There's currently a raging debate over what exactly is causing record inflation in the U.S. This paper, coming from a less partisan source than, say, the White House, boosts the arguments of Democratic lawmakers and progressive economists who say companies are taking advantage of this moment to push prices up.

Details: The paper's authors looked at company data from 2005 to 2018 in 35 industries to see how businesses of varying sizes within sectors reacted to "positive cost shocks" (when the price to make stuff goes up).

• In more concentrated industries, companies passed 25 percentage points more of those costs on to consumers.
• The paper's estimates are "conservative," the authors write, because concentration increased sharply after 2018.
• The US economy is at least 50% more concentrated today than in 2005, they write.

Crucial: The authors are not arguing that monopoly power causes inflation, but that it's "an amplifying factor" that allows companies to pass on more of the costs of "supply shortages, energy price shocks, and labor market tightness."

The other side: Many economists — notably Larry Summers — argue that inflation has more to do with supply chains, record pandemic-driven demand and increasing wages for workers.

Of note: The paper doesn't name specific industries, but the issue of corporate concentration is of particular urgency in the current baby formula shortage crisis.

• Just four companies — Abbott Laboratories, Mead Johnson, Perrigo and Nestle — account for more than 87% of the market, according to IBISWorld, as Axios' Nathan Bomey recently reported.
• Similarly, just four companies supply about 70% of the beef in the U.S., according to data from the North American Meat Institute cited by Reuters. The White House argues that helped drive the huge increases in meat prices last year.

What to watch: A more detailed version of this Boston Fed paper is forthcoming.