Rising retail prices is called inflation. Higher prices without higher incomes reduce people’s ability to buy. Since the 1990s, inflation has run at a very modest pace.

But in 2021 a spike in inflation occurred. Why?

It’s basic economics: demand is outrunning supply!

First, COVID has disrupted the production and distribution of goods. Some producers closed their doors, some had to restart production in the midst of a labor shortage. Due to globally connected economies, goods come from everywhere, and the virus affected many economies’ capacity to produce given lock downs, social distancing, and hospitalizations.

Second, consumers switched to buying more goods relative to services because of the existing virus. This demand change forced manufacturers to move resources to more goods production, a costly undertaking.

Third, government and Federal Reserve stimulus is at play. Public measures employed to assist people during the pandemic have fueled more spending. Some industries cannot meet this demand in the short term, so prices rise.

But there is a non-COVID element to this: Beginning in the 1980s, but especially since the 1990s, American business has concentrated. Concentration causes a reduction in business competition.     Pushing prices through the entire supply chain out to retail prices protects the profits and purchasing power of companies.  Declines in purchasing power occur for everyone whose income rises less than the price hikes.  While this is not necessarily inflationary, concentration does give firms the means to pass through any imposed cost increases to retail prices.

Policy Suggestion: Support policies to restrict business mergers and buyouts.