Greedflation

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The term Greedflation first appeared during the COVID-19 pandemic to describe the idea that some inflation is driven by increases in corporate profits. Suggested mechanisms include price gouging, price fixing, windfall gains resulting from information asymmetry, monopoly-like power, and external shocks to the economy. The theory, which first gained traction among left-wing pundits and trade unions, [1] was considered fringe until 2023.

Contents

Some economists have argued profits have played a greater role in the post-COVID-19 2021-2023 inflation surge than during the period of inflation in the 1970s. [2]

History

In the wake of the COVID-19 pandemic, inflation increased significantly as did discussion of the role of corporate profits in that increase. [3] [4] Proponents of the theory pointed to data showing that corporate profits outpaced inflation. [3] Economists interviewed by PolitiFact believe rising costs of goods, labor, and real estate are bigger drivers of inflation than corporate profits. [3] Combatting inflation by ensuring corporations are not taking excessive profits was cited by some Democrats ahead of the 2024 United States elections. [5] [6]

Mechanisms

Information asymmetry

In August 2024, the Associated Press reported that greedflation was easing as consumers become more discriminating. [7]

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Economic analysis

In the words of Paul Hannon writing for The Wall Street Journal in December 2023, "[t]here is broad consensus among economists that the role of profits in fueling inflation is one feature of the recent inflationary episode that made it different from the 1970s. Yet how much of a role profits played is the subject of controversy." [2]

Mainstream media opposition

In July 2023, The Economist criticized the entire concept of greedflation as "nonsense" and argued 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 COVID-19 pandemic. [8] [ dubious – discuss ]

In August 2024, CNN argued that greedflation is "for sure a thing" but is "not a primary driver of inflation when averaged out across all industries".[ dubious – discuss ] [9]

Observing the PCE Index (published by F.R.E.D.); as given by a quarterly, end-of-period reporting scheme; under a natural logarithmic transformation of the data points, it purports decreased consumer expenditure since 2020; with an average rate of 0.88% from Q2-2020 to Q4-2021, 0.47% from Q1-2022 to Q1-2023, compared to an average rate of 0.27% from Q2-2023-Q3-2024. Therefore the above claim is false given by its unsupported argument. [10]

Economists' opposition

In 2022, several economists stated that while price gouging could be a minor contributor to continuing inflation, it is "not one of the major underlying causes" that started this surge. [11] [12] [13] [14]

Libertarian critics, citing a study by the Cato Institute, accused the Groundwork Collaborative study of deliberately "cherry pick[ing] a one year timeframe [2023] to tell a misleading story", and that profits are not a major fact in inflation. [15]

Economists' support

In the United States, some Democratic politicians, [11] [14] as well as other observers, have contended that price gouging or "greedflation" exacerbated the inflation surge in the United States. [11] [12] [13] In January 2023, the Federal Reserve Bank of Kansas City released a study showing markup growth likely contributed more than 50 percent to inflation in 2021, far above normal; however, the markup itself could be due to expectations around future costs. [16] [17] 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. It warned that inflation due to profit-taking could lead to an economic downturn created by sustained higher interest rates. [18]

Fossil fuels

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. [19] 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%. [20] Isabella Weber warned in December 2023 that energy prices are so volatile that special attention should be paid to them to try and keep future supply shocks from causing more sellers' inflation (Weber's term for greedflation). [2]

See also

References

  1. ↑ Peck, Emily (May 13, 2023). "Once a fringe theory, greedflation gets its due". Axios. Retrieved November 22, 2024.
  2. 1 2 3 Hannon, Paul (December 2, 2023). "Outsize Profits Helped Drive Inflation. Now Consumers Are Pushing Back". The Wall Street Journal. There is broad consensus among economists that the role of profits in fueling inflation is one feature of the recent inflationary episode that made it different from the 1970s. Yet how much of a role profits played is the subject of controversy.
  3. 1 2 3 Czopek, Madison (August 28, 2024). "Fact-check: Sen. Casey blamed rising prices on corporations". PolitiFact . Retrieved September 1, 2024.
  4. ↑ Misra, Udit (June 26, 2023). "ExplainSpeaking: What is Greedflation? Does India also have it?". The Indian Express. Retrieved August 21, 2024. There is a growing consensus across the world that corporate greed is the new villain in town...
  5. ↑ Whalen, Jeanne (August 23, 2024). "Price-Gouging Crusade Electrifies Democratic Rank and File". The Wall Street Journal.
  6. ↑ Masquelier-Page, Alice (August 16, 2024). "Harris zeroes in on high food and housing prices as inflation plays a big role in the campaign". The Associated Press. Retrieved August 29, 2024.
  7. ↑ Colvin, Jill (August 15, 2024). "Harris zeroes in on high food prices as inflation dominates the presidential race". Associated Press. Retrieved August 21, 2024– via PBS News.
  8. ↑ ""Greedflation" is a nonsense idea". The Economist. Archived from the original on July 6, 2023.
  9. ↑ Goldman, David; Buchwald, Elisabeth (August 20, 2024). "The truth behind Harris' inflation and corporate greed claims | CNN Business". CNN. Retrieved August 21, 2024.
  10. ↑ "Personal Consumption Expenditures".
  11. 1 2 3 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.
  12. 1 2 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.
  13. 1 2 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.
  14. 1 2 Smith, Molly; Wasson, Erik (May 19, 2022). "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.
  15. ↑ Brown, Aaron (October 29, 2024). "The misuse of data behind the 'greedflation' narrative". Reason.com. Retrieved October 29, 2024.
  16. ↑ Glover, Andrew; Mustre-del-Río, José; von Ende-Becker, Alice (January 12, 2023). "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.
  17. ↑ Arnold, Martin; Nilsson, Patricia; Smith, Colby; Strauss, Delphine (March 29, 2023). "Central bankers warn companies on fatter profit margins". Financial Times.
  18. ↑ Smith, Talmon Joseph; Rennison, Joe (May 30, 2023). "Companies Push Prices Higher, Protecting Profits but Adding to Inflation". The New York Times. Retrieved May 31, 2023.
  19. ↑ Cronin, Brittany (May 7, 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 May 25, 2022.
  20. ↑ Newman, Rick (July 25, 2023). "High profit margins on gasoline are costing drivers more". Yahoo Finance.
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