Years of experience suggest that although profit margins tend to return to their mean, deviations can increase for a time and the eventual return can be slow and very difficult to predict. In the United States, markups have remained unusually elevated of late, absorbing little of the rise in the cost of energy, import, and materials.
Does it matter whether the shock to margins comes from a change in potential supply or aggregate demand? What type of pricing behavior reconciles these outcomes? How are they consistent with the expectation that margins return to means?