Developing nations do themselves a huge disfavor and injustice by not expanding their analysis and actions with regard to tackling inflation. For some reason, economic managers in many of such countries stick ardently to the manipulation of interest rates (read interest rate hikes) as sure kryptonite in their bids to destroy the Superman called inflation. Not even the fact that such actions over time have not led to the right results is slowing them down. There is another downside; raising interest rates spurs economic recessions because what it does very effectively is to slow down economic activities by putting borrowing companies in trouble and discouraging borrowing as interest rates rise. Raising rates also encourage more people with surplus funds to park excess money in banks to earn interest rather than invest in new ventures. Companies tend to lay off staff and shrink operations whenever interest rates rise. Developing countries like Nigeria can ill-afford to increase unemployment rates – by whatever metrics it is measured. But this is exactly what we do.
I am writing today to again bring our attention to the fact that there is new thinking around inflation management. And established nations are already thinking in this direction. rather than merely raising interest rates. To this effect, inflation has receded in many of these countries (the US has been able to depress inflation to 3%, the EU to 5.3% and the UK at 6.8%, while Nigeria still battles at 24.08% as I type this.
Again, I bring to us the work of Isabella Weber. Simon Grothe, in a recent article titled “Isabella Weber Has Neoliberal Economists Running Scared”, has called attention to a truism – that economic managers need to look at the impact of corporate profits on inflation. In Nigeria, one may add that there is a need to consider the actions of middlemen who may take undue advantage of final consumers. In general, one may conclude that this is the time for economic managers to be more empirical, more analytical, and more active in tackling inflation. Sitting on our hands waiting for inflation to recede – and it will certainly not as a result of increases in interest rates – will not work. And of course, this means that we have left inflation management to central banks. Inflation is often not just a monetary policy. We need other models. The fact that central banks stepped up to commit to inflation targeting does not mean they alone can do it. Empirically, it is obvious that instruments of monetary policy have been blunt when used for inflation management – especially in developing countries. I believe that this is an obvious point but let’s take some explanation from Dr Weber.
There is something called Seller’s Inflation, and this is a situation where firms systematically pass along the inflationary pressures that they face to the poor final consumer as they occur. This was noticed as a fallout of the Covid-19 pandemic, but chances are that it is habitual. Chances are also that the pandemic, the fear, and the lockdowns have emboldened businesses as they have seen that they can get away with a lot of things. In countries like Nigeria where the consumer is even more powerless and voiceless, beaten down by the worst pangs of poverty, I believe it is trite that we do a comprehensive study of corporate profits, but not only that we find ways of looking at the activities of middlemen. For example, there are middlemen in the agricultural space who buy directly from the farm gate. Some are doing that under the guise of being commodity brokers or exchanges. The Buhari administration tried to enact a law protecting poor farmers from these types of guys by stipulating what volumes could be bought at the farm gate. The idea has not taken root and I have seen the usual suspects poohpoohing Bola Tinubu’s idea of returning commodity boards (who could organize themselves and stand up to these smart alecs). So, in a place like Nigeria, we have to worry about corporate exploitation AND the many shenanigans of smaller entities who gouge prices and make life tougher for the poorest amongst us. If the USA and Europe can do this, why can’t we? Grohe wrote that the “International Monetary Fund (IMF), the Organization for Economic Co-operation and Development (OECD), and the central banks of the United States (the Federal Reserve) and the Eurozone (the European Central Bank) have published multiple studies addressing Weber’s analysis”.
THE FOUR PHASES OF SELLER’S INFLATION ACCORDING TO WEBER
Quoting Weber/Grothe, the gradual decay occurs as below:
- Phase one: stability. It’s another day under capitalism. People go to work, make and sell things, and their bosses keep some as profit and pay a wage from the rest.
- Phase two: impulse. Real shortages in key commodities, the cost of which enter the production of many others, lead to a price shock.
- Phase three: pass-through. Firms protect their profit margins from the increased cost of inputs by raising their own prices. Of course, given that capitalist enterprises are hardly charities, they try their utmost to pass along the increased costs to their clientele. Like a hot potato, the price increase is passed from company to company until it ends up in the supermarket with a higher price tag. How do workers get rid of the hot potato? They demand higher wages, in turn, to stabilize their purchasing power in real terms.
- Phase four: conflict. Employees fight for higher wages to compensate for losses in purchasing power, which means an increase in costs for companies, which in turn increases prices. Yet by no means is this a conflict on a level playing field, since employees are merely trying to compensate for previous losses in their real wages.
The above analogy is how inflation feeds on itself and when companies begin to pass on more than the increased cost of inflation, they could spur a vicious cycle that leads to a spiral of price increases, higher poverty, lower purchasing power, layoffs and unemployment, unsafe societies, and eventual collapse. Developed countries like the US have learnt this for long. They have the experience and the safeguards. They have much better regulation of most of their industries. In Nigeria, we don’t have these. We are therefore far more vulnerable to seller’s inflation.
There’s even another psychology to this. Hear Grothe:
“Moreover, companies can more easily enforce price increases with their customers when the latter are accustomed to hearing about new cost shocks and growing inflationary pressures every day in the media. Some in the American press have labeled this dynamic “excuseflation.” Legendarily, the head of Iron Mountain related in an earnings call in 2018 that he would pray for inflation every day because it allowed him to push through higher profit rates. He added that his prayer for inflation was, for him, like a “rain dance.”” (This means that he prays for inflation the way traditionalists pray to the god of rain in a drought).
The argument in these ‘smart’ countries has since shifted away from interest rates, or ballooning money supply as a result of money printing – e.g for shocks like COVID-19 – and to the supply side. Economists are now calling for more attention on price-setting mechanics (do we know how prices are set for anything in Nigeria? How scientific? How much information?), and windfall profit taxes (even though this is after the fact). They have moved away from making a devil out of government expenditures, which are often critical… and remain so for a country like ours.
