Blanchard & Posen: Inflation tied to Corporations Trying to Maintain Profit Margins

I have posted this model of core inflation before. Core inflation on y-axis. Corporate-after-tax profit rate minus nominal rates on x-axis.

inf taller 15

The model implies that inflation depends upon the difference between an aggregate corporate profit rate and nominal rates. The more nominal rates cut into corporate profit rates, the more corporations would choose to raise prices to maintain “net” profit rates… and thus create inflation.

Olivier Blanchard and Adam Posen wrote last December in 2015 an article titled, Japan’s Solution Is to Raise Wages by 10 Percent. As wages rise, corporate profit rates come down. So if you want to cut into corporate profit rates but cannot do it by raising nominal rates, then do it by raising wages. Either way, the data points move left on the x-axis making inflation increases more likely.

Olivier Blanchard and Adam Posen give the logic of the model when they say in their article…

“The point is not to redistribute income from business to labor. If anything, employers and other price setters should be encouraged to pass on the increased costs from wages to consumer prices and try to maintain their profit margins.”

The key to inflation is making corporations try to maintain their profit margins. But supply-side economics has lowered corporate taxes, lowered minimum wages, weakened unions and more in order to raise corporate profit margins. Is it any wonder that inflation will be low for years to come?