The dissertation analyzes the surge of corporate profits during the economic recovery from the COVID-19 pandemic with a focus on the US. This aspect of the recent inflation made it apparent to larger parts of the population what the actual source of inflation is: It is firms raising prices. This basic insight is oftentimes mystified in public discourse where inflation is mostly understood as an outside enemy of society, which has to be dealt with by society as a whole by reducing aggregate demand. The narrative of inflation being the outside enemy covers crucial distributional aspects.

Reviewing the literature allows us to identify at least 12 channels which con- tributed to increases in profits and profitability measures such as profit shares, profit margins and markups. The variety of these channels suggests two broader interpretations of the Sellers’ Inflation hypothesis put forward by Weber and Wasner (2023) which states that cost shocks originated in bottleneck sectors and were propagated, and in some cases amplified in the downstream production networks. The behavioral, or activist interpretation claims that firms in competitive sectors actively raised their prices as a profiteering strategy. The structural interpretation is more modest and simply states that profits increased beyond some historical trends.

There are some studies that analyzed the structural interpretation; however, it is important to choose a correct comparison period as the pandemic recovery was both an inflationary period and a recovery. The dissertation shows that profit shares exhibit some pro-cyclicality but that the U.S. profit share surged when capacity utilization was still below pre-pandemic levels. Additionally, while unit labor cost drove most of the price increases after the oil price shocks of the 1970s, it were unit profits that reaped the largest share of the recent inflation. Furthermore, the dissertation tests a claim by the behavioral interpretation of Sellers’ Inflation by estimating the response of firm-level markups to sectoral cost shocks. Firms were on average able to increase their markups in periods of input cost shocks during the recent inflationary period. Specifically, a one percentage point increase in sectoral input costs is associated with an increase in firm-level markups by 0.44 to 0.5 percentage points. Furthermore, we find a slightly lower effect for dominant firms, indicating a stronger preference for preserving market shares. The estimation includes two robustness checks with a shift-share instrumental variable approach and a difference-in-difference regression.

Since studies for other countries found constant pass-through of input cost shocks to be the dominant behavior of firms, the dissertation suggests labeling these dynamics similarly as profit-led inflation to emphasize their distributional source. Arguing that constant markups are somewhat natural even in periods of cost shocks is naturalizing capital’s claim on social output and would equally require stable real wages to be classified as natural.