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Workers carry the biggest costs of the Fed’s policy while rising prices have been transferred to consumers

Autor: Article based upon analysis from Reuters Breakingviews | Link: Fed battle has workers taking hit for greedflation
Timp de citit: 2 minute

Fed’s policy of raising rates until prices stabilize has a perverse effect: jobs are being cut, while companies, the big ones at least, continue to make profits.

According to Reuters, the Federal Reserve could tame its latest pattern of monetary policy, especially since the likes of PepsiCo and Kroger say that inflation is becoming them.

During the pandemic, blockages in supply chains and labor shortages served as arguments for U.S. companies to jack up prices.

Many firms reported increasing profits, as corporations passed the rising costs to consumers whose disposable income decreased.

Between January 2020 and July 2022, employee compensation increased by 13%, while companies’ profits rose 53%, according to the U.S. Bureau of Economic Analysis.

Kroger Chief Executive Rodney McMullen characterized inflation as “always good” for the grocery business in June 2021.

The same goes for PepsiCo, whose Chief Financial Officer Hugh Johnston signaled in October that the beverage giant „is capable of taking any pricing we need”.

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So while more people become jobless and many firms reap extraordinary prices, a new term has emerged to characterize this economic reality: “greedflation”.

The Fed, like any other central bank, considers inflation its top priority, so it boosted its benchmark rate to a target range of 4.25 – 4.5%, its highest level in 15 years.

As the Fed’s hikes slow economic growth and prompt firms to fire people, policymakers expect unemployment to jump from 3.7% to 4.6% in 2023.

Nevertheless, is expected that sacrificing some jobs will be seen as a lesser cost at Fed, whose
Chair Jerome Powell noted in December that “the worst pain” would come if inflation stays high.

There is a less painful alternative though for avoiding mass layoffs, and that’s changing the rigid 2% inflation target.

If the Fed chooses to rise it then it could give the labor market some breathing space even though that might also mean a bit longer battle against rising prices.