Testing the Sellers’ Inflation Theory : The Role of Markups

2021-2022 marks the period where inflation accelerated globally, after more than 10 years of low and stable inflationary pressures. Many economists have asserted the causes of this recent increase in inflation: external pressures, driven by a surge in international prices due to the Russian-Ukraine war; internal pressures, partially explained by increasing government spending and sizeable fiscal deficits. However, some economists have moved away from mainstream theories and have focused on corporate profits, monopolistic behavior and rent seeking as main drivers of inflation. I address the so-called sellers' inflation theory by looking at the cumulative response on headline inflation to a 1\% quarterly national markup increase in Italy for the period 1996-2023. Results suggest that first, markups have increased since 2021, but are still lower than the 1996-2019 average, and secondly, that the effect of increasing markups on inflation is found to be not statistically significant. Moreover, Granger causality shows that inflation causes markups and not the other way around. When differentiating between 1996-2009 and 2010-2023, markups only have a positive effect on inflation in the second sample, albeit not statistically significant. I disaggregate markups as well by sector and find that manufacture and mining are the only sectors whose markups have a significant impact on inflation, although negatively. Despite the fact that these results cannot be extrapolated to other countries, this paper suggests that sellers' inflation is more of a theoretical concept than a practical one in Italy