Greedflation Explained

Greedflation describes a phenomenon where prices are raised to artificially high levels by corporate greed,[1] [2] [3] such as price gouging.[4]

Price gouging became highly prevalent in news media in the wake of the COVID-19 pandemic, when state price gouging regulations went into effect due to the national emergency. The rise in public discourse was associated with increased shortages related to the COVID-19 pandemic.

The resulting inflation after the pandemic has also been blamed, at least in part, by some on price gouging. During the pandemic, the idea of 'Greedflation' or 'seller's inflation' also moved out of the progressive economics fringe by 2023 to be embraced by some mainstream economists, policymakers and business press.[5]

History

The term 'Greedflation' was a candidate for word of the year for the Collins Dictionary in 2023[6] and was added to Dictionary.com in 2024.[7] [8] 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.”

Price gouging and windfall profits

In the United States, some Democratic politicians and other observers have contended that price gouging or "greedflation" exacerbated the inflation surge in the United States.[9] [10] They 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. 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.

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.[11] [12] 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."[13] Wolfers states that companies will always charge the highest prices possible, but that competition keeps prices in check.

Economists have stated that during times of high inflation, consumers know prices are increasing but do 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.[14] One example of this was the meat industry, where profits went up industry-wide as prices went up, because demand never decreased.[15]

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.[16] [17] 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.[18] The economists 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.[19] 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.[20]

UBS Global Wealth Management chief economist Paul Donovan said this has happened because post-pandemic household balance sheets have kept consumer spending demand strong enough to encourage producers to raise prices faster than costs, and because consumers have been gullible enough to find exaggerated narratives justifying such price hikes plausible: "Consumers seem to be buying stories that seem to justify price increases, but which really serve as cover for profit margin expansion."[21]

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."[22]

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."

A 2022 Working Paper by the International Monetary Fund explores the implementation of windfall profit taxes, which have gained renewed interest following the COVID-19 pandemic, the war in Ukraine, and subsequent surges in energy and food prices. The paper discusses the potential of such taxes as a tool for efficiently taxing economic rents, which are often a result of monopolistic power or unexpected events like pandemics, war, or natural disasters, and contribute to windfall profits. Such profits have raised public and policy concerns about price gouging, where firms are perceived to be profiting excessively from unforeseen circumstances.[23]

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. However, many businesses have maintained or even increased their prices, bolstering their profits and potentially keeping inflation high. This strategy could pressure the Federal Reserve to keep raising interest rates, increasing the likelihood of an economic downturn. Analysts suggest that the continued high consumer prices are due to several factors, including increased demand for goods and services as households emerge from the pandemic, constrained supply chains, and consumers' willingness to spend more due to government stimulus payments, investment gains, pay raises, and low-interest mortgage refinancing. One investment firm estimates that these spending habits may change this summer as the bottom 25% of income earners fully deplete their pandemic savings. Some economists warn that wealthier households are affected less by inflation, with higher prices encouraging poorer consumers to substitute for less expensive purchases.[24]

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.[25]

According to a 2023 article in The Economist, there has been a notable rise in market concentration across various sectors, leading to significantly higher profits for dominant firms, especially in Western economies. This trend has been linked to concerns about greed-fueled price increases, particularly in sectors like energy and healthcare where large firms have been able to collect substantial economic rents.[26]

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.[27] 2024 studies by the Groundwork Collaborative had similar findings.[28] [29]

In August 2024, CNN argues that greedflation has been going on by some companies in some industries and certain actions can help at the margins but measures like price caps would be a counterproductive way to fight it.[30] Some data has also emerged showing that greedflation is easing as consumers become more discriminating.[31]

Fossil fuels

See main article: article. 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.[32]

The major American and British oil producers (Big Oil) reported record profits in 2022.[33] [34] [35] Amid longstanding constraints in refinery capacity, refinery profit margins were higher than their historical averages.[36] In July, 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.[37] In late October, U.S. President Joe Biden accused the oil and gas sector of "war profiteering" and threatened to seek a windfall profit tax if the industry did not increase production to curb gasoline prices.[38]

Also, some argued the possibility of a "base effect" phenomenon that emerged due to a significant decline in certain prices, such as oil, at the onset of the pandemic. Comparing these anomalously low prices with the subsequent higher prices has then accentuated the perceived inflation.[39] [40]

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%.[41]

Grocery prices

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.[42] [43] [44]

The Federal Trade Commission released a report in March 2024 finding that large grocery retailers "accelerated and distorted" the effects of supply chain disruptions to protect their profits. The analysis found that some large retailers "seem to have used rising costs as an opportunity to further hike prices to increase their profits, and profits remain elevated even as supply chain pressures have eased." 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, and that in some cases "suppliers preferentially allocated product to the purchasers threatening to fine them." Some suppliers, however, were already contractually bound to supply other retailers. FTC chair Lina Khan said "dominant firms used this moment to come out ahead at the expense of their competitors and the communities they serve." Although the pace of grocery price increases had abated since the 2022 surge, prices had not since fallen overall by 2024. Retailers have said they planned smaller price increases in 2024 as consumers had begun to push back against high prices, causing some retailers to lose sales. The FTC also objected to continued elevated profit margins as evidence that there was not enough competition in the grocery sector.[45] 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.[46]

Motor vehicle prices

In the United States, higher motor vehicle prices were a significant contributor to the inflation surge. 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. Manufacturers emphasized higher-margin luxury vehicles, while dealers increased their markups over manufacturer list prices. A study published by the Bureau of Labor Statistics, the agency that tracks consumer prices, found that dealer markups accounted for 35% to 62% of new vehicle inflation from 2019 to 2022. Paul Ryan, the CEO of a shopping app that monitors prices across about 40,000 dealerships, remarked, "it was the best of times for car dealers, for sure."[47]

Shrinkflation

Shrinkflation occurs when companies reduce the amount of a product or service to increase profits, and is one manifestation of greedflation.[48]

References

  1. Web site: Misra . Udit . 2023-06-26 . ExplainSpeaking: What is Greedflation? Does India also have it? . 2024-08-21 . The Indian Express . en.
  2. News: Addley . Esther . 2023-11-01 . ‘AI’ named most notable word of 2023 by Collins dictionary . 2024-08-21 . The Guardian . en-GB . 0261-3077.
  3. Web site: Mueller . Julia . 2023-06-20 . ‘Greedflation’ is the new inflation as corporate profits balloon . 2024-08-21 . The Hill . en-US.
  4. Web site: Raymond . Art . June 14, 2022 . What the heck is ‘greedflation’ and why are Democrats touting the idea? . 2024-08-21 . Deseret News . en . 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..
  5. News: Peck . Emily . May 18, 2023 . Once a fringe theory, "greedflation" gets its due . Axios.
  6. News: October 31, 2023 . AI named word of the year by Collins Dictionary . 2024-08-21 . en-GB.
  7. News: Bisset . Victoria . 2024-02-13 . Barbiecore? Bed rotting? Greedflation? Dictionary.com adds new 2024 words. . 2024-08-21 . Washington Post . en-US . 0190-8286.
  8. Web site: Shah . Simmone . 2024-02-13 . 'Bed Rotting,' 'Girl Dinner,' and Dictionary.com's Other New 2024 Words . 2024-08-21 . TIME . en.
  9. News: Brooks . Khristopher J. . May 27, 2022 . Companies use inflation to hike prices and generate huge profits, report says . CBS News . live . https://web.archive.org/web/20220625121623/https://www.cbsnews.com/news/retail-price-gouging-lowes-amazon-target-accountable-us/ . 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. .
  10. News: DePillis . Lydia . June 3, 2022 . Is 'Greedflation' Rewriting Economics, or Do Old Rules Still Apply? . The New York Times . live . https://web.archive.org/web/20220625122819/https://www.nytimes.com/2022/06/03/business/economy/price-gouging-inflation.html . 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. .
  11. News: Lopez . German . June 14, 2022 . Inflation and Price Gouging - We look at whether "greedflation" is causing higher prices. . live . https://web.archive.org/web/20220625122822/https://www.nytimes.com/2022/06/14/briefing/inflation-supply-chain-greedflation.html . June 25, 2022 . The New York Times . 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. News: Democrats' 'Greedflation' Claims Run Up Against Scant Evidence - Some Democrats accuse companies of bilking US consumers . Smith . Molly . Wasson . Erik . . 2022-05-19 . 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. .
  13. News: The mystery of rising prices. Are greedy corporations to blame for inflation? . Vanek Smith . Stacy . . 2022-11-29 . 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. .
  14. News: Greedflation: are large firms using crises as cover to push up their profits? . Inman . Phillip . . 2023-03-24 . 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. .
  15. News: Inflation or "corporate greed"? Meat prices increased by double digits during pandemic . Bojorquez . Manuel . . 2022-03-09 . 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." .
  16. News: 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. . Eavis . Peter . Talmon . Joseph Smith . . 2022-05-31 . 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. .
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  19. Web site: Burns . Tobias . 2024-03-29 . FTC calls out profits as a driver of grocery prices . 2024-08-17 . The Hill . en-US.
  20. News: Hannon . Paul . Why Is Inflation So Sticky? It Could Be Corporate Profits . The Wall Street Journal . May 3, 2023. 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.
  21. News: Donovan . Paul . Fed should make clear that rising profit margins are spurring inflation . 12 February 2023 . Financial Times . 2 November 2022.
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  25. News: Europe's Inflation Outlook Depends on How Corporate Profits Absorb Wage Gains . . June 26, 2023. Niels-Jakob Hansen. Frederik Toscani. Jing Zhou. 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..
  26. News: Is big business really getting too big?. . July 12, 2023 . https://web.archive.org/web/20230716103725/https://www.economist.com/business/2023/07/12/is-big-business-really-getting-too-big . December 12, 2023. July 16, 2023 .
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  28. News: Perkins . Tom . 2024-01-19 . Half of recent US inflation due to high corporate profits, report finds . 2024-08-17 . The Guardian . en-GB . 0261-3077.
  29. News: Bhattarai . Abha . Stein . Jeff . 2024-02-03 . Inflation has fallen. Why are groceries still so expensive? . 2024-08-17 . Washington Post . en-US . 0190-8286.
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  32. News: Cronin . Brittany . The good times are rolling for Big Oil. 3 things to know about their surging profits . 25 May 2022 . NPR . 7 May 2022 . en . May 21, 2022 . https://web.archive.org/web/20220521123900/https://www.npr.org/2022/05/07/1097177459/big-oil-exxon-earnings-gasoline-prices-crude . live .
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  37. News: UK lawmakers approve windfall tax on oil and gas producers . Reuters . July 11, 2022.
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  41. News: Newman . Rick . High profit margins on gasoline are costing drivers more . Yahoo Finance . July 25, 2023.
  42. News: Tankersley . Jim . Biden Takes Aim at Grocery Chains Over Food Prices . The New York Times . February 1, 2024.
  43. News: The costly economic trend here to stay . BBC . September 24, 2023.
  44. News: Kaplan . Juliana . The 10 products that have shrunk the most under shrinkflation . Business Insider . December 17, 2023.
  45. Web site: Burns . Tobias . 2024-03-29 . FTC calls out profits as a driver of grocery prices . 2024-08-17 . The Hill . en-US.
  46. News: Ngo . Madeleine . Large Grocers Took Advantage of Pandemic Supply Chain Disruptions, F.T.C. Finds . The New York Times . March 21, 2024.
  47. News: Why Is Inflation So Stubborn? Cars Are Part of the Answer. . The New York Times . May 20, 2023. Lydia DePillis. Jeanna Smialek.
  48. Web site: 2024-03-08 . Biden calls out 'shrinkflation' as part of a broader strategy to reframe how voters view the economy . 2024-08-21 . AP News . en.

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