The establishments of monopolies in some areas of the economy are a factor that drives inflation higher. The health care sector, energy sector and education sector are all areas in which there exist very limited if no competition. The establishment and existence of monopolies in sectors of the economy does the exact opposite for the economy what the dismantlement of monopolies does. Prices stay relatively high rather than being driven lower by competition. In energy, OPEC has a monopoly in which it essentially controls the majority of the world's oil and can quote any price. With our industries so dependent on oil, the United States has no choice but to pay whatever price is demanded. Inflation soars as a result. In health care, local monopolies dominate and the system does not allow patients to shop for health care like it does anything else. In the health care industry, there is no choice for the “customer” to try to get the best doctor for the best price as if he/she were shopping for a car. The monopoly system prevents the patient from shopping for the best price and doctor. Education is dominated by a vast number of monopolies which keep the financial resources from going only to the best schools. In all three sectors, since there is no competition, cost reducing innovations are reluctant to be developed or implemented because prices can stay high and wages can be high as a result.
The last root cause of inflation comes with increases in input prices. Input prices target the aggregate supply curve. Just as wages affected aggregate supply, so do input prices in the form of rents and other increased expenses such as increased oil prices. Increased prices for goods that are used by firms to produce and manufacture their own goods shift the aggregate supply curve to the left (see figure 7). Firms cannot produce as much without increasing prices to cover their expenses. Their desire is to retain the same level of profit and therefore they must increase prices because of the increase in input prices. This type of inflation is referred to as cost push inflation. The costs to the firms and businesses have increased and push consumer prices higher and inflation higher as a result. High energy costs to firms increase inflation as well. Recently, when core inflation rose, the Fed blamed higher rents and oil prices, rather than the expanding economy. It appears to have been right; energy prices have come down and rent increases moderated; core inflation has decreased in response.
Conclusion:
For decades the Federal Reserve was dependent on the Phillips curve when implementing policy to adjust inflation and unemployment. However, in recent years, it has been discovered that there are factors which determine the level of inflation with a greater impact than unemployment. The main factor is competition. Competition to all markets in the United States macro economy has led to other factors which have led to the breakdown of the importance of the Phillips curve in recent years. Competition both domestically and from abroad stemming from the 1970's has led to decreased prices and decreased wages limiting inflation. Retail competitors domestically and competition in key economic market areas like the auto and steel industry have drove down overall prices. Competition led to the break of monopolies which previously controlled the industries and controlled prices. Competition to lenders in the money market has made the cost of borrowing less expensive stimulating investment and driving prices and inflation up. Industries in which there is no competition have driven inflation up. Industries dominated by monopolies are not allowed to have cost-reducing innovations implemented and thus prices stay relatively high. Rents and input prices also add to inflation. With increased input prices and rents comes increased consumer prices and increased inflation. It's for all these factors and not the level of unemployment that has contributed to the explanation as to why the Fed stopped raising interest rates last summer when core inflation was rising. It also helps explain why the Fed is reluctant to cut rates now even though it sees inflation edging lower over the next two years.
This article is relevant to macroeconomic theory. We know that the Phillips curve does break down when aggregate demand outgrows aggregate supply and so it is very feasible that it may not apply at other times. The theory that other factors such as input prices are a more determinant factor of inflation does apply as it makes a direct correlation just like the Phillips curve. Although the Phillips curve does not hold in the long run, and in the short run has been having less of a relationship, it still holds in theory. If unemployment increases, there will be less production and output which will create a new equilibrium. Prices will decrease, lowering inflation, and upholding the relationship between inflation and unemployment. But, fact of the matter is that competition over recent years in all markets and input price fluctuations along with the complimentary establishment and establishment of monopolies seem to show more evidence of impacting inflation in recent years. In light of the fact that competition and input prices effect inflation so drastically, I would suggest that the government create competition in all industries, eliminate any monopolies, and try to keep input prices at a minimum in any way possible. This will ensure lower price levels, and lower inflation.
