Greedflation from Causal Paths between Profits and Inflation

Abstract

The pandemic and the war in Ukraine are prompting many to ask whether old macroeconomics still apply? DePillis (2022) notes that profits and inflation are highly correlated, but the direction and strength of the causal path linking them is unknown. This paper briefly describes new causal path decision rules based on exogeneity tests, generalized correlations, and stochastic dominance. We apply the decision rules to the recent 300 quarters (75 years) and the subset of the latest ten quarters (2.5 years) of data. We find that higher corporate profits drive higher prices (greed-inflation) only in the latest ten quarters, not in all 300 quarters. We include R code so the reader can replicate our results. A quick relief from greed-propelled 2021-22 inflation is possible by reviving John Kennedy’s jawboning of profiteers.

Keywords: Corporate greed, inflation, kernel causality, stochastic dominance, kernel regression, nonparametrics

JEL Classification: E31, E60, C14, C54, C87