Financial sector profits, labor income, and the divergence of consumer and producer prices

Abstract American consumer and producer prices historically have been closely linked. Since the 1980 s, coinciding with many other changes in the American economy, they have diverged. This paper uses an Engle-Granger error correction model on time series from 1959 to 2023 to evaluate potential reasons for this divergence, such as diminished antitrust enforcement, weaker unions, tax code changes, interventionist monetary policy, asset booms, and the rise of globalization to paint a full picture of the reasons why consumer and producer prices have diverged. Divergence has not been primarily from profits in the real economy. Policy changes since the 1980 s, often deemed neoliberal, have caused this divergence, which has come from financial sector profits, interventionist monetary policy, stagnant labor income, and globalized markets. Although the neoliberal era has brought macroeconomic prosperity and rising living standards, it has been heavily skewed toward larger firms and those who own more appreciating assets.