Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / The Corporate Rent-Seeking Trap In Modern Stagflation
Transcript
- Lucas: Let's look at the numbers for September again, because there is a dissonance here that most analysts are ignoring. Unemployment ticked up to four point two percent, job openings dropped, and yet corporate profits in many sectors haven't just held steady—they've expanded. This isn't the classic cost-push inflation we saw in twenty-twenty-two when energy and supply chains broke. Luna: Right, and it's not just about supply constraints anymore. I'm seeing reports that many large-cap companies are raising prices on essential goods even when their input costs have actually fallen. That feels like something different than a temporary shock. Lucas: Exactly. It's what economists call rent-seeking through pricing power. When markets are concentrated, firms don't need rising costs to justify higher prices; they just need the ability to extract more surplus from consumers who have fewer alternatives. With core services inflation stuck around three percent, this structural shift is becoming the main engine of stagflation. Luna: But isn't some of this just efficiency? If a company becomes more dominant, shouldn't they be able to operate leaner? Lucas: That's the argument they make in earnings calls, sure. But look at the data from August. The PCE price index is up, yet nominal GDP growth is slowing. When you combine slowing real GDP with persistent price increases, you get that stagnant-growth, high-inflation trap. The money isn't going into expansion or wages; it's staying in corporate coffers as margin expansion. Luna: So the consumer is paying more for less, and the business isn't investing that extra revenue back into productivity? That sounds like a wealth transfer rather than growth. Lucas: Precisely. It's a wealth transfer from the balance sheets of households to the balance sheets of corporations. And the interesting part is that this happens quietly. There's no headline about a monopoly being formed today. It's just that in healthcare, logistics, and software, there are only three players left, and they all raise prices by five percent simultaneously. Luna: I remember reading about how some hospital networks consolidated and then immediately jacked up prices, even though their operational costs didn't change much. It was pure leverage. Lucas: That's the textbook example. Healthcare is arguably the worst offender because insurance intermediaries muffle the immediate pain for consumers until they hit deductibles. But it's happening in other sectors too. Look at the industrial sector—some of those mid-cap manufacturers are reporting record margins despite weaker demand signals. They're squeezing customers because they know customers have nowhere else to go. Luna: Does the Federal Reserve see this as a policy problem? Or do they just see it as a lagging indicator of past inflation? Lucas: The Fed sees it as sticky inflation. They don't necessarily distinguish between inflation caused by a war in Europe and inflation caused by a merger in Ohio. To them, if the price level keeps rising while growth slows, the tool is the same: raise rates. But raising rates doesn't break up monopolies. It just makes borrowing expensive for everyone, including the small businesses that might otherwise compete with those dominant firms. Luna: So monetary policy might actually be reinforcing the very market structures that are causing the pricing power issue. That seems counterproductive. Lucas: It is. High interest rates hurt leveraged startups and small entrants first. The incumbents have cash reserves and debt issued years ago at lower rates. So the economic pressure of tight money clears out the competition, leaving the remaining giants even more dominant. It's a self-reinforcing cycle of consolidation. Luna: This feels like the opposite of what free-market theory promises. Where is the competitive discipline? Lucas: Competition requires entry. And entry is currently blocked by scale advantages, regulatory capture, and capital allocation strategies that prioritize share buybacks over R&D or new capacity. When a company spends its excess cash buying back stock instead of building a factory to compete, it's signaling that it wants to keep prices high and supply low. Luna: That's a really sharp distinction. Buybacks versus investment. Most people just see the stock price go up and think everything is fine. Lucas: For the shareholder, yes. For the economy, it's deflationary in terms of output but inflationary in terms of prices. You get asset price inflation for the owners and consumer price inflation for the workers. It's the worst of both worlds for anyone not holding equity. Luna: If you're listening and this resonates with your own experience of prices going up while your paycheck stays flat, we'd love to support this work. Fexingo is an independent economics show, and listener support keeps us ad-free so we can dig into these details without corporate sponsors asking us to soften our critique. If you want to help us keep digging, you can find us at buy me a coffee dot com slash fexingo. Every bit helps us stay focused on the truth of the data. Lucas: Thanks for listening. Now, let's get back to why this matters for your portfolio. Because if these margins are artificial, built on lack of competition rather than efficiency, they are fragile. Luna: Fragile in what way? Usually, when people talk about fragile margins, they mean a recession hits and nobody buys anything. Lucas: No, I mean politically and regulatorily. When profit margins reach historic highs during a period of stagnant wages, it creates massive social friction. We are already seeing antitrust actions ramp up in the EU, and the US Department of Justice is taking a much harder look at vertical integration in tech and healthcare. Luna: So the risk isn't just economic—it's legal. Companies could be forced to divest or break up, which would suddenly crash their pricing power models. Lucas: Exactly. And if you hold stocks based on the assumption that this pricing power is permanent, you're exposed to a sudden regime change. The market is currently pricing these companies as if they will always have this monopoly rent. But history shows that regulation eventually catches up to profitability. Luna: So the smart money might actually be looking for companies that are undervalued because they are fighting these trends, rather than riding them. Small caps that are innovating their way into gaps? Lucas: Potentially. Or companies in sectors that are inherently competitive—like retail or basic manufacturing where entry barriers are lower. Those sectors tend to have thinner margins, but they also don't carry the political risk of being singled out for anti-trust scrutiny. Luna: It's a trade-off. Lower margins now, but maybe more safety later. Versus the high-margin giants that are sitting ducks for regulators. Lucas: Right. And don't forget that as these giants face pressure, they might try to cut costs aggressively. That means layoffs. Which brings us back to the unemployment rate ticking up to four point two percent. The pricing power comes at the expense of labor stability. Luna: Which makes the stagflation picture even worse. You have high prices, weak jobs, and now potential job cuts as companies defend those margins against regulatory threats. Lucas: It's a vicious cycle. The economy slows, companies raise prices to protect profits, the central bank keeps rates high, and the whole system grinds downward. The only way out is either a breakthrough in productivity that lowers costs structurally, or a major regulatory intervention that forces competition back into the market. Luna: Productivity is still that wild card. If AI actually delivers on the hype, it could lower costs enough to break the pricing power hold. But we're not seeing that in the data yet. Lucas: Not in the aggregate data. We're seeing it in isolated pockets, but overall, productivity growth is sluggish. And until that changes, the tension between corporate greed and consumer affordability will remain the defining feature of this economic era. Luna: So the question for investors isn't just 'what will grow,' but 'who can survive the backlash?' Because the backlash is coming. Lucas: Exactly. And if you're holding onto those mega-cap names thinking their moats are impenetrable, you might want to check if the water is rising faster than you thought. Luna: Good reminder. Stay curious, stay critical, and we'll see you next time.