Wikipedia

Greedflation

Greedflation, or sellers' inflation,[1] describes inflation that is driven by corporate profits.[2][3][4] This can happen through mechanisms like price gouging[5], price fixing or windfall gains resulting from information asymmetry, monopoly-like power and external shocks to the economy.

The inflation that arose during the pandemic led to more acceptance of the idea of greedflation or 'seller's inflation' beyond the progressive economics fringe. By 2023, sellers' inflation was embraced by some mainstream economists, policymakers, and the business press.[6] Organizations and notable people that have expressed concern about greedflation include the IMF, the European Central Bank, Federal Reserve Bank of Kansas City, FTC, Institute for Public Policy Research, Groundwork Collaborative, Isabella Weber, and Robert Reich. Some proposed remedies include pursuing anti-trust enforcement, windfall profit taxes, anti-trust enforcement and anti-price gouging measures like price caps.[7]

Organizations and notable people who dispute the concept or are less concerned about sellers' inflation include the The Economist, CNN, Federal Reserve Bank of San Francisco, Justin Wolfers, Jason Furman, and Noah Smith.[7]

History

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Look up Greedflation in Wiktionary, the free dictionary.

The term 'Greedflation' was a candidate for word of the year for the Collins Dictionary in 2023[3][8] and was added to Dictionary.com in 2024.[9][10] Dictionary.com defines it as “A rise in prices, rents, or the like, that is not due to market pressure or any other factor organic to the economy, but is caused by corporate executives or boards of directors, property owners, etc., solely to increase profits that are already healthy or excessive.”[9]

Greedflation was discussed in the news media in the wake of the COVID-19 pandemic when inflation increased significantly.[11] Proponents of the theory pointed to data showing that corporate profits outpaced inflation as well as to price fixing lawsuits against food companies.[11] Economists interviewed by PolitiFact believe rising costs of goods, labor and real estate are bigger drivers of inflation than profits, which could still be a contributing factor.[11] Combatting inflation by ensuring corporations are not taking excessive profits has become a major campaign platform for Democrats ahead of the 2024 United States elections.[12]

Mechanisms

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Monopoly power

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Isabella Weber and Evan Wasner say firms with a lot of market power in consolidated industries can raise prices under the cover of inflation as a form of implicit cartel-like coordination.[13]

Some economists and politicians argue that the market concentration that has occurred in recent decades in some major industries, especially retailing, has given companies the ability to wield near-monopolistic pricing power.[14]

In Australia in 2023 and 2024, major supermarket chains Coles and Woolworths received criticism as price gouging, with critics pointing to their 65% share of Australia's grocery market[15] and their higher prices in neighborhoods with less competition.[16][17][18][19][20]

The meat industry in the United States has been cited as an example where profits went up industry-wide as prices went up, with some pointing to consolidation and a lack of competition as an underlying cause.[21]

Many economists responded by noting that if these large corporations indeed had so much market power, they could have used it to increase prices at any time, regardless of the pandemic.[14]

Information asymmetry

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Main article: Information asymmetry

Some economists have stated that during times of high inflation, consumers know prices are increasing but may not have a good understanding of what reasonable prices should be, allowing retailers to raise prices faster than the cost inflation they are experiencing, resulting in larger profits.[22][23][14][24][25]

Some data has also emerged suggesting that greedflation is easing in 2024 from consumers become more discriminating.[26]

Proposed remedies

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Anti-trust enforcement

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Main articles: Competition law and Price fixing

Economists at the University of Massachusetts Amherst say firms with a lot of market power in consolidated industries can raise prices under the cover of inflation as a form of implicit cartel-like coordination.[13][27]

Windfall profit taxes

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Main article: Windfall profit tax

Windfall profit taxes have gained renewed interest following the COVID-19 pandemic, the war in Ukraine, and subsequent surges in energy and food prices. As major American and British oil producers (Big Oil) reported record profits in the first half of 2022[28][29][30][31] the UK imposed a 25% windfall profit tax on British North Sea oil producers, which expected to raise £5 billion to pay for a government scheme that reduced household energy costs.[32] In October of that year, U.S. President Joe Biden threatened to seek a windfall profit tax if the industry did not increase production to curb gasoline prices.[33]

Eric Levitz argues that windfall taxes are worth pursuing regardless of whether greedflation is a major factor or not, as it would incentivize producers to invest in expanding production (which takes pressure off of prices) instead of giving out dividends to shareholders.[7]

Thomas Baunsgaard and Nate Verson of the IMF recommend implementing permanent windfall profit taxes on fossil fuel extraction but not temporary taxes or taxes on renewable energy.[34] The taxes should always target a clear measure of excess profits and not be tied to price levels or revenue.[34]

Notable supporters include other economists like Joseph Stiglitz[35] Isabella Weber,[36] and others.[37][38][39]

Anti price gouging laws

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Main article: Price gouging

Eric Levitz argues that these laws are worth pursuing regardless of whether greedflation is a major factor or not.[7] Isabella Weber recommends strict price gouging legislation, praising the 2023 proposal in New York to cap price increases during emergencies to 10% for consumers as well as for businesses upstream.[40][36]

Price caps

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Main article: Price ceiling

Isabella Weber and her colleagues argue for price caps.[41][36] Paul Krugman changed his mind and expressed interest in adding price caps to the toolkit to flight inflation.[41]

CNN argues against price caps.[42]

Role in post-COVID inflation spike

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Main article: 2021-2023 inflation surge

Arguments that greedflation was significant

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In the United States, some Democratic politicians[22][43] and other observers have contended that price gouging or "greedflation" exacerbated the inflation surge in the United States.[22][23][14]

Robert Reich, who worked under President Bill Clinton as Labor Secretary, stated, "Nobody believes that price gouging is the main cause of inflation...The question really is whether corporate pricing power is aggravating the situation. And there's a great deal of evidence it is."[43]

In January 2023, the Federal Reserve Bank of Kansas City, released a study which stated that "...markup growth likely contributed more than 50 percent to inflation in 2021, a substantially higher contribution than during the preceding decade. However, the markup itself is determined by a host of unobservable factors, ... We conclude that an increase in markups likely provides a signal that price setters expect persistent increases in their future costs of production."[44][27]

A May 2023 New York Times story reported that despite the costs of doing business falling in recent months, many large corporations have continued to raise prices, contributing to the recent inflation surge. The prices of oil, transportation, food ingredients, and other raw materials have decreased as the shocks from the pandemic and the Ukraine war have faded though many businesses have maintained or even increased their prices and profits. This could lead to an economic downturn created by higher interest rates.[45]

A December 2023 paper published by the UK-based Institute for Public Policy Research and Common Wealth think tanks stated that corporate profiteering played an important role in the inflation spike of 2022. Corporate profits surged while wages failed to keep pace with rising prices, resulting in the working class suffering the largest decline in disposable and discretionary income since World War II.[46] 2024 studies by the Groundwork Collaborative had similar findings.[47][48]

Criticism

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In 2022, several economists stated that price gouging could be a minor contributor to continuing inflation, but it is not one of the major underlying causes that started this surge.[22][23][14][43] Justin Wolfers, an economist at the University of Michigan quotes Jason Furman, who served as chair of the Council of Economic Advisers under President Obama said, "Blaming inflation on [corporate] greed is like blaming a plane crash on gravity. It is technically correct, but it entirely misses the point."[49] Wolfers states that companies will always charge the highest prices possible, but that competition keeps prices in check.[49]

In July 2023, The Economist criticized the entire concept of 'greedflation' as 'nonsense' and claimed that rising prices are not due to 'greedy companies' but are a natural result of supply and demand issues caused by the cash infusion to the economy which took place during the pandemic.[50]

In August 2024, CNN argues that greedflation 'is for sure a thing' but is not a primary driver of inflation when averaged out across all industries.[42]

Profit margins

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A 2021 analysis conducted by the New York Times found that profit margins across more than 2,000 publicly traded companies were well above the pre-pandemic average during the year, as corporate profits reached a record high.[51][52] Economists at the University of Massachusetts Amherst found that in 2022 profit margins of US companies reached their highest level since the aftermath of World War II.[27]

An International Monetary Fund study published in June 2023 found that rising corporate profits accounted for almost half of the increase in euro area inflation during the preceding two years.[53]

European Central Bank economists found in May 2023 that businesses were using the surge as a rare opportunity to boost their profit margins, finding it was a bigger factor than rising wages in fueling inflation during the second half of 2022.[54]

In July 2023, Eric Levitz in Intelligencer contested the idea that greedflation was a significant factor in post-pandemic inflation, noting that many of the studies rely on correlation not causation. He also provides an example of how a used car salesman would see profits improve on his existing inventory without cost increases as one example of how companies can get unusual profits without improper behavior.[7] However, he find one argument plausible, even if unproven, that supply shocks could result in greedflation as shortages make it harder for new entrants to gain market share.[7]

Fossil fuels

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See also: Fossilflation

Shortly after initial energy price shocks caused by the Russian invasion of Ukraine subsided, oil companies found that supply chain constrictions, already exacerbated by the ongoing global COVID-19 pandemic, supported price inelasticity, i.e., they began lowering prices to match the price of oil when it fell much more slowly than they had increased their prices when costs rose.[55] Analysis published in June 2023 by the Bureau of Labor Statistics found that from February 2020 through May 2023, gasoline retailing profit margins had increased 62%.[56]

Grocery prices

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An analysis published in early 2024 by the White House Council of Economic Advisers found that grocery and beverage retailers had increased their margins by nearly two percentage points since the eve of the pandemic, to the highest level in two decades. The analysis found that grocer margins had remained elevated as the inflation surge eased, though margins for other types of retailers had fallen back to historical levels. President Joe Biden and others asserted that shrinkflation, a practice of reducing portion or quantity sizes of packaged foods while maintaining the same price, was keeping profit margins higher than usual.[57][58][59][60]

The Federal Trade Commission released a report in March 2024 finding that some large retailers did not drop prices when input costs dropped. The study found some large retailers sought to gain an advantage over smaller competitors by threatening suppliers with large fines if strict delivery requirements were not met. The FTC also objected to continued elevated profit margins as evidence that there was not enough competition in the grocery sector.[61] The FTC and several state attorneys general in February 2024 sued to block a proposed $25 billion merger between large grocery chains Kroger and Albertsons, arguing the deal would reduce competition and likely lead to higher consumer prices.[62]

Motor vehicle prices

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An analysis published in May 2023 by the New York Times found that auto manufacturers and dealers shifted from a high volume-low margin business model before the pandemic to a low volume-high margin model after the pandemic. A 2023 study published by the Bureau of Labor Statistics found dealer markups outpaced input costs, driving 35% to 62% of new vehicle inflation from 2019 to 2022.[63] Isabella Weber argues that the shortage of chips gave existing producers a 'temporary monopoly' where they did not have to worry about new entrants, allowing them to raise prices.[40]

References

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  1. ^ Masquelier-Page, Alice (2024-08-16). "Harris zeroes in on high food and housing prices as inflation plays a big role in the campaign". The Associated Press. Retrieved 2024-08-29.
  2. ^ Misra, Udit (2023-06-26). "ExplainSpeaking: What is Greedflation? Does India also have it?". The Indian Express. Retrieved 2024-08-21.
  3. ^ a b Addley, Esther (2023-11-01). "'AI' named most notable word of 2023 by Collins dictionary". The Guardian. ISSN 0261-3077. Retrieved 2024-08-21.
  4. ^ Mueller, Julia (2023-06-20). "'Greedflation' is the new inflation as corporate profits balloon". The Hill. Retrieved 2024-08-21.
  5. ^ Raymond, Art (June 14, 2022). "What the heck is 'greedflation' and why are Democrats touting the idea?". Deseret News. Retrieved 2024-08-21. But what in the world is "greedflation" and why has it become a thing? Well, that's a term of art for corporate price gouging that's been in vogue of late and particularly among Democratic Party leaders who are pointing to it as a noteworthy driver of ongoing, record-high inflation across the U.S.
  6. ^ Peck, Emily (May 18, 2023). "Once a fringe theory, "greedflation" gets its due". Axios.
  7. ^ a b c d e f Levitz, Eric (2023-07-08). "The 'Greedflation' Debate Is Deeply Confused". Intelligencer. Retrieved 2024-08-26. Similarly, one can make a case for windfall-profits taxes and anti-price-gouging measures without endorsing the greedflation hypothesis. In my own view, it isn't necessarily all bad for producers of high-demand goods to earn high profits — if they reinvest those profits into expanded production. If the public's need for vaccines or computer chips far outstrips their supply, then it would be good for the makers of such things to have more capital at their disposal. On the other hand, if such producers earn windfall profits, then disperse them to investors rather than reinvesting them, there is a case for public policy to change their incentives or redistribute their earnings.
  8. ^ "AI named word of the year by Collins Dictionary". October 31, 2023. Retrieved 2024-08-21.
  9. ^ a b Bisset, Victoria (2024-02-13). "Barbiecore? Bed rotting? Greedflation? Dictionary.com adds new 2024 words". Washington Post. ISSN 0190-8286. Retrieved 2024-08-21.
  10. ^ Shah, Simmone (2024-02-13). "'Bed Rotting,' 'Girl Dinner,' and Dictionary.com's Other New 2024 Words". TIME. Retrieved 2024-08-21.
  11. ^ a b c Czopek, Madison. "Fact-check: Sen. Casey blamed rising prices on corporations". PolitiFact. Retrieved 2024-09-01.
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  13. ^ a b Burns, Tobias (2024-03-29). "FTC calls out profits as a driver of grocery prices". The Hill. Retrieved 2024-08-17.
  14. ^ a b c d e DePillis, Lydia (June 3, 2022). "Is 'Greedflation' Rewriting Economics, or Do Old Rules Still Apply?". The New York Times. Archived from the original on June 25, 2022. When thinking about greedflation, it's helpful to break it down into three questions: Are companies charging more than necessary to cover their rising costs? If so, is that enough to meaningfully accelerate inflation? And is all this happening because large companies have market power they didn't decades ago? ... There is not much disagreement that many companies have marked up goods in excess of their own rising costs. ... When all prices are rising, consumers lose track of how much is reasonable to pay. ... But most of the public argument has been about whether companies with more market share have been affecting prices once goods are finished and delivered. And that's where many economists become skeptical, noting that if these increasingly powerful corporations had so much leverage, they would have used it before the pandemic.
  15. ^ Ainsworth, Kate (2024-04-15). "Woolworths and Coles will be asked to explain their profits and higher prices today. Here's what to expect". ABC News. Retrieved 2024-08-20.
  16. ^ Taylor, David (2024-01-24). "Are you being gouged at the supermarket check-out? Here's what we know". ABC News. Retrieved 2024-08-20.
  17. ^ Taylor, David (2024-02-27). "'No-one has to earn a 30pc profit rate': Coles accused of gouging shoppers as they struggle to put food on table". ABC News. Retrieved 2024-08-20.
  18. ^ Hurst, Bree; Richards, Carol; Johnson, Hope; Messner, Rudolf (2024-05-08). "Yes, Australia's big supermarkets have been price gouging. But fixing the problem won't be easy". The Conversation. Retrieved 2024-08-20.
  19. ^ Barrett, Jonathan (2024-06-19). "Typical Aldi grocery bill 25% cheaper than at major supermarkets, Choice research finds". The Guardian. ISSN 0261-3077. Retrieved 2024-08-20.
  20. ^ Staszewska, Ewa (January 10, 2024). "What to know about the looming supermarket price-gouging review". SBS News. Retrieved 2024-08-20.
  21. ^ Bojorquez, Manuel (2022-03-09). "Inflation or "corporate greed"? Meat prices increased by double digits during pandemic". CBS news. According to quarterly reports for Tyson, the nation's largest meat processor, the company posted $3 billion in profit in 2021. ... Other major meat suppliers are also posting similar profits. Some analysts like Salvador believe the numbers don't add up. ... But what we see at the same time is that their profitability has been able to increase because the demand increases for their products have more than offset their cost increases. ... Salvador said there is nothing to keep the prices from increasing as long as "there isn't competition that will help drive down the prices so that they have a reason to actually be more reasonable."
  22. ^ a b c d Lopez, German (June 14, 2022). "Inflation and Price Gouging - We look at whether "greedflation" is causing higher prices". The New York Times. Archived from the original on June 25, 2022. But inflation gives greedy, monopolistic companies a chance to take advantage, said Lindsay Owens, the executive director of the left-leaning Groundwork Collaborative. Profiteering 'is an accelerant of price increases,' she told me. 'It is not the primary cause.'...More recent developments have also weakened the greedflation theory. Inflation has remained high...But the stock market has plummeted;...If the pursuit of profits were driving more inflation, you would not expect to see that.
  23. ^ a b c Brooks, Khristopher J. (May 27, 2022). "Companies use inflation to hike prices and generate huge profits, report says". CBS News. Archived from the original on June 25, 2022. Some of the nation's largest retailers have been using soaring inflation rates as an excuse to raise prices and rake in billions of dollars in additional profit, a corporate watchdog group charged on Friday. ... The report highlights an ongoing debate about the causes of inflation, with some consumer advocates arguing that corporations are using inflation as a justification for passing on even higher price hikes to consumers. ... To be sure, inflation is rising sharply due to a number of underlying economic issues, such as supply-chain bottlenecks, labor shortages and strong demand from consumers.
  24. ^ Inman, Phillip (2023-03-24). "Greedflation: are large firms using crises as cover to push up their profits?". The Guardian. Andrew Bailey, the Bank of England governor, says he has no evidence that excessive profits are pushing up inflation beyond where it would be if companies simply passed on extra costs to consumers, ... Albert Edwards, a senior analyst at Société Générale, ... "Companies [have] under the cover of recent crises, pushed margins higher," he said in a note. "And, most surprisingly, they still continue to do so, even as their raw material costs fall away. Consumers are still 'tolerating' this 'excuseflation', possibly because excess [government] largesse has provided households with a buffer. ... Isabella Weber, an economist at the University of Massachusetts Amherst, has shown which kinds of companies are able to benefit from a crisis, giving academic support for what she considers a rational capitalist reaction to a crisis, one that allows them to make even bigger profits when consumers are primed to expect prices to rise in leaps and bounds.
  25. ^ Donovan, Paul (2 November 2022). "Fed should make clear that rising profit margins are spurring inflation". Financial Times. Retrieved 12 February 2023. Consumers seem to be buying stories that seem to justify price increases, but which really serve as cover for profit margin expansion.
  26. ^ "Harris zeroes in on high food prices as inflation dominates the presidential race". PBS News. 2024-08-15. Retrieved 2024-08-21.
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  38. ^ Harvey, Fiona. ""Polluting elite" belch out far more than their fair share of emissions". Mother Jones. Retrieved 2024-08-28.
  39. ^ Hebous, Shafik; Prihardini, Dinar; Vernon, Nate (2022). "Excess Profit Taxes: Historical Perspective and Contemporary Relevance". IMF Working Papers. 2022 (187): 1. doi:10.5089/9798400221729.001. Retrieved December 12, 2023.
  40. ^ a b Carter, Zachary (2023-06-06). "What if We're Thinking About Inflation All Wrong?". The New Yorker. ISSN 0028-792X. Retrieved 2024-08-29.
  41. ^ a b Carter, Zachary (2023-06-06). "What if We're Thinking About Inflation All Wrong?". The New Yorker. ISSN 0028-792X. Retrieved 2024-08-29.
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  43. ^ a b c Smith, Molly; Wasson, Erik (2022-05-19). "Democrats' 'Greedflation' Claims Run Up Against Scant Evidence - Some Democrats accuse companies of bilking US consumers". Bloomberg News. Many Democrats blame price-gouging companies for the worst surge in Americans' cost of living in more than a generation. But economists, including several who are left-leaning, disagree.
  44. ^ Glover, Andrew; Mustre-del-Río, José; von Ende-Becker, Alice (2023-01-12). "How Much Have Record Corporate Profits Contributed to Recent Inflation? - Firms raised markups during 2021 in anticipation of future cost pressures, contributing substantially to inflation" (PDF). The Federal Reserve Bank of Kansas City Economic Review. doi:10.18651/er/v108n1glovermustredelriovonendebecker. ISSN 0161-2387. S2CID 256654064.
  45. ^ Smith, Talmon Joseph; Rennison, Joe (May 30, 2023). "Companies Push Prices Higher, Protecting Profits but Adding to Inflation". The New York Times. Retrieved 31 May 2023.
  46. ^ Inman, Phillip (December 7, 2023). "Greedflation: corporate profiteering 'significantly' boosted global prices, study shows". The Guardian. Retrieved January 6, 2024.
  47. ^ Perkins, Tom (2024-01-19). "Half of recent US inflation due to high corporate profits, report finds". The Guardian. ISSN 0261-3077. Retrieved 2024-08-17.
  48. ^ Bhattarai, Abha; Stein, Jeff (2024-02-03). "Inflation has fallen. Why are groceries still so expensive?". Washington Post. ISSN 0190-8286. Retrieved 2024-08-17.
  49. ^ a b Vanek Smith, Stacy (2022-11-29). "The mystery of rising prices. Are greedy corporations to blame for inflation?". NPR. Wolfers says companies are always trying to charge as much as they possibly can. In fact, the only reason we're not all paying $800 for a pair of socks or a cheeseburger is simply due to greed in another form: competition. ... "Inflation is coming from demand," says Wolfers. In spite of inflation, demand hasn't really blinked. Companies have been raising prices and we have been paying them. In fact, in many parts of the economy, spending has been rising right along with prices. ... And when our buying slows down, Wolfers says, companies will start lowering prices to entice us to buy: Prices will fall and inflation will ease. But, until demand drops, companies will push prices up as much as they can. It's elementary.
  50. ^ ""Greedflation" is a nonsense idea". The Economist. Archived from the original on 6 July 2023.
  51. ^ Eavis, Peter; Talmon, Joseph Smith (2022-05-31). "After a Bumper 2021, Companies Might Struggle to Increase Profits - Businesses face headwinds as demand weakens, the Federal Reserve raises rates and government stimulus programs end". New York Times. A New York Times analysis of over 2,000 publicly traded companies outside the financial sector found that most of them increased sales faster than expenses, a remarkable feat when the cost of wages, raw materials and components was rising and supply chains were out of whack. As a result, profit margins, which measure how much money a business makes on each dollar of sales, rose well above the prepandemic average. On the whole, companies made an estimated $200 billion in additional operating profits last year because of that increase in margins.
  52. ^ Phillips, Matt (March 31, 2022). "Corporate profits hit a new record high in 2021". Axios.
  53. ^ Niels-Jakob Hansen; Frederik Toscani; Jing Zhou (June 26, 2023). "Europe's Inflation Outlook Depends on How Corporate Profits Absorb Wage Gains". International Monetary Fund. As the Chart of the Week shows, the higher inflation so far mainly reflects higher profits and import prices, with profits accounting for 45 percent of price rises since the start of 2022. That's according to our new paper, which breaks down inflation, as measured by the consumption deflator, into labor costs, import costs, taxes, and profits. Import costs accounted for about 40 percent of inflation, while labor costs accounted for 25 percent. Taxes had a slightly deflationary impact.
  54. ^ Hannon, Paul (May 3, 2023). "Why Is Inflation So Sticky? It Could Be Corporate Profits". The Wall Street Journal. Inflation has proved more stubborn than central banks bargained for when prices started surging two years ago. Now some economists think they know why: Businesses are using a rare opportunity to boost their profit margins...According to economists at the ECB, businesses have been padding their profits. That, they said, was a bigger factor in fuelling inflation during the second half of last year than rising wages were
  55. ^ Cronin, Brittany (7 May 2022). "The good times are rolling for Big Oil. 3 things to know about their surging profits". NPR. Archived from the original on May 21, 2022. Retrieved 25 May 2022.
  56. ^ Newman, Rick (July 25, 2023). "High profit margins on gasoline are costing drivers more". Yahoo Finance.
  57. ^ Tankersley, Jim (February 1, 2024). "Biden Takes Aim at Grocery Chains Over Food Prices". The New York Times.
  58. ^ "The costly economic trend here to stay". BBC. September 24, 2023.
  59. ^ Kaplan, Juliana (December 17, 2023). "The 10 products that have shrunk the most under shrinkflation". Business Insider.
  60. ^ "Biden calls out 'shrinkflation' as part of a broader strategy to reframe how voters view the economy". AP News. 2024-03-08. Retrieved 2024-08-21.
  61. ^ Burns, Tobias (2024-03-29). "FTC calls out profits as a driver of grocery prices". The Hill. Retrieved 2024-08-17.
  62. ^ Ngo, Madeleine (March 21, 2024). "Large Grocers Took Advantage of Pandemic Supply Chain Disruptions, F.T.C. Finds". The New York Times.
  63. ^ Lydia DePillis; Jeanna Smialek (May 20, 2023). "Why Is Inflation So Stubborn? Cars Are Part of the Answer". The New York Times.
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