Once a fringe theory, “greedflation” gets its due

https://www.axios.com/2023/05/18/once-a-fringe-theory-greedflation-gets-its-due

by danaris • 3 years ago

71 139 3 years ago

Centigonal• 3 years ago

Definitely! Same with layoffs, and same with "kitchen sink" quarters.

Any corporate action that results in negative PR is more likely in an environment where others are doing the same thing, since the negative PR cost is lower when it's a normal industry trend. So we should expect this kind of stairstep behavior.

olliej• 3 years ago

The general "price increases are because of inflation" is trivially disproven: if a company's profit ratio increases after price increases, the price increases are not due to inflation. That politicians get to stand up and say such trivially falsifiable BS without being called out is demonstrative of how much they are owned by businesses.

thegrim33• 3 years ago

I agree with you 100%, although the issue with your statement is that you mentioned profit ratio, which is the correct metric to look at, whereas 99% of the articles on this topic only look at raw profit numbers, not profit ratio. Article upon article upon article is posted with the same headlines about "company X had record profit numbers this year", but none of these articles ever look at profit ratio. By definition, in times of inflation, even if a company maintains the same exact profit ratio, their raw profit numbers will increase.

octobus20216• 3 years ago

The only way profit would increase without increasing profit margins is if the volume increased. While I don't have the data I think it would be safe to say that volume did not increase but actually went down due to all craziness in 2020/2021, so it makes sense to assume that the profit margins went up. Which can be easily seen in corporate reports where they report not only on net profit but on profit margins as well.

ycombinatornews• 3 years ago

In this theory, are salaries part of the profit or not? Cause they are not in the accounting scheme of things

danaris4• 3 years ago

I mean, that's part of the absurdity of this all—if the companies raised exec salaries enough to erase the extra profit, it would be much harder to draw a clear line to this phenomenon.

But they can't be satisfied with that. They need the stock price to rise, so they need to be able to show record profits.

So they boast loudly of their record profits to their investors, while crying crocodile tears to the media about how terrible the supply line problems are, and how the government has handed so much money to the American people in the COVID stimulus (see, $2000/household 3 years ago can totally raise prices across the board for years on end), so these must be the source of all the price increases, don't you see?

bryanlarsen4• 3 years ago

Also trivially proven. " Corporate profit growth accounted for nearly 60% of inflation"

https://www.npr.org/2023/05/19/1177180972/economists-are-rec...

(edit: fixed link)

tedunangst• 3 years ago

How do they calculate those numbers?

I buy materials for $100 and sell them for $120 for 20% profit. My costs rise to $110 so I raise the price to $135. Consumers see inflation of 12.5%. What percentage of that is corporate profit and how much is whatever else inflation is?

makomk2• 3 years ago

The fact that money is ending up as corporate profits does not actually prove that corporate profits are causing inflation. For example, consider natural gas: it's now vital to producing all kinds of things, from fertilisers and electricity to consumer goods. Supply of it was already tight coming out of the pandemic as factories tried to catch up on missed production and consumers spent the money they'd saved up from furlough, boosted unemployment, etc - then Russia choked off their exports and invaded Ukraine and there wasn't enough.

This directly choked off the amount of stuff that consumers could purchase, causing inflation as more money chased less goods and services. That money ended up as profits at gas producers; their costs hadn't changed, but the market price of their product increased until demand dropped down to meet the available supplies. However, this doesn't mean that inflation could be avoided if we could only stop the greedy gas companies from profiteering and force them to charge less. They cannot supply the amount the global economy would consume if everyone's wages were worth as much and they could buy as much with them as before, which means any lower prices would be fake: there'd be people and businesses who'd want to buy at those prices but couldn't despite having the money, much like how the Soviet Union or Venezuela ended up with empty shelves. For the same reason, wage increases to try and bring people's spending power back to what it was cause further inflation - this is why central banks are worried about a wage-price spiral but the idea of a profit-price spiral is just populist nonsense.

ls612• 3 years ago

Greedflation is bullshit because it’s not like companies weren’t greedy in 2019. Inflation has changed between four years ago and today, whatever explanation you want for that needs to have something changing to cause the inflation. Profit maximization attempts are not one of the things that have changed.

JohnFen3• 3 years ago

Not saying this is the explanation, but here's a possibility. True, greed is a constant, but what companies can get away with isn't. It may be the case that companies can get away with putting the screws to everyone harder now than they could prior to 2020.

adrienthebo• 3 years ago

Profit maximization attempts have changed; supply chain disruptions provided an opportunity for corporations to increase their prices in unison. Prior to the pandemic there was more risk in unilateral price increases but now companies can look at pricing velocity and effectively work as a cartel without engaging in explicit conspiracy.

megaman821• 3 years ago

Either people have more money to absorb these cost increases or demand for some other non-essential goods is tanking. If it wasn't the government printing a bunch of money and it ending up in people hands to buy essential things, what are the non-essential things that no one is buying anymore?

camgunz4• 3 years ago

Greedflation is the phenomenon whereby corporations increase their prices to chase higher profits, hoping that they can blame it on "inflation". This then intensifies inflation. I think everyone--including people like Jerome Powell--agrees this is happening.

toomuchtodo2• 3 years ago

"If corporate profits were to decline from the extremely high levels that we saw recently, would it be possible to sustain" growth in workers' benefits "even as we get inflation down to the target of 2%?" Democratic Senator Chris Van Hollen asked Powell during the Fed chief's semi-annual testimony before the U.S. Senate Banking Committee.
While that might be difficult in the long run, "over the shorter term though, yes," Powell said, dipping tentatively into a debate that may become more pointed over time depending on how inflation, the job market and the economy evolve.

https://www.reuters.com/markets/us/feds-powell-acknowledges-...

WalterBright13• 3 years ago

Companies and people have always been greedy.

Here's the actual cause of inflation:

https://www.federalbudgetinpictures.com/federal-spending-per...

This extra spending is paid for with inflation.

WalterBright13• 3 years ago

Here's why that doesn't work as an explanation.

Suppose ham costs $50 and eggs cost $50. You have $100.

Now Porky Pig gets greedy and raises the price of ham to $60. Now you have only $40 to spend on eggs, and (due to the Law of Supply & Demand) the price of eggs declines.

I.e. this greediness does not put more money in peoples' pockets to pay for it. A general price increase is not possibly caused by greed. Inflation is a general increase, and requires an increase in the supply of money relative to the value of goods and services in the economy.

And that way that happens is the government prints the extra money with no collateral. History is full of examples, including our current inflation.

WalterBright13• 3 years ago

For my whole life, every time oil prices rose the media blamed it on "corporate greed". Every time they fell, there was silence.

majormajor6• 3 years ago

If you want to avoid too much blowback you need a scapegoat. The last few years have provided plenty:

* pandemic

* supply chain disruptions

* shifts from services to goods

* shifts back

The economy doesn't have enough major players for true perfect competition to exist in most industries. Your costs go up a bit? Why not try to get away with passing on some extra to pad your bottom line as well? Who is going to stop you or call you out on it right now?

I'm sure I'm not the only person here who's sat in a meeting for a company where there were high-level individuals talking about "how much can we get away with charging" entirely separately from "what are our raw unit costs."

pessimizer• 3 years ago

talking about "how much can we get away with charging" entirely separately from "what are our raw unit costs."

This is what all rational businesses without real competition do. Using costs to set prices is throwing money away, unless your costs are higher than your prices for a strategic reason and you're calculating how long you can continue doing that before you miss payroll.

bryanlarsen4• 3 years ago

According to the Planet Money episode, 60% of inflation was due to profit inflation.

prepend5• 3 years ago

What causes profit inflation? Companies are certainly greedy. But usually they can’t raise prices because people can’t pay.

Now people can pay, at least for now.

jnwatson• 3 years ago

Why couldn’t this happen before? Competition. If you raised your prices, your competitors would see an opportunity and you’d lose market share

Now competition has been consolidated away.

With the pandemic, corporations have accidentally entered into an experiment leading to new price discovery. Without competitors, all that’s in the way of increasing prices is consumers’ willingness to buy.

mitthrowaway22• 3 years ago

It does seem that the corporate landscape is less competitive than it once was.

If two brands of cereal are owned by the same parent company, they aren't really competitors.

If one hundred parent companies are owned by the same investment index fund, whose management votes on behalf of its investors, are those hundred companies really competitors with each other?

mrguyorama2• 3 years ago

Go look at your cleaning products aisle in your local grocery store. Every single item is created by one of two brands, with a couple items from tiny, niche, lifestyle brands.

Every other aisle is the same story. Two or three companies, with a few small groups also throwing a hat in the ring.

The grocery store is also owned by one of two companies, with again, a couple small time competitors that haven't been purchased yet.

kibwen• 3 years ago

Trustbusting is one of the most crucial roles of government, and the US government has utterly failed in this duty.

mrguyorama2• 3 years ago

The US government willingly gave up this duty by popular vote, through politicians promising it would all "trickle down".

voisin2• 3 years ago

Canadian government as well. Consolidation has only increased over the last 30 years.

__MatrixMan__• 3 years ago

Adtech wasn't always good enough to drive demand on its own, and the markets weren't always so noisy that you could get away rebranding and ripping off the same stooges a second time.

vasco2• 3 years ago

I've tried to search a bit and all I can find are statistics on new business formation in the USA which shows a 2x rate than 10 years ago - twice more businesses started per year. This doesn't mean there isn't more consolidation at the top, but do you have any link to statistics showing less competition?

octobus20216• 3 years ago

New business formation numbers are utterly meaningless. I can "start a business" by filing an application with the State and paying $100/$200 fee. And don't do anything with it.

There is plenty of evidence of consolidation. For most recent one look up analysis on spike of price of eggs. The egg production turned out to be controlled by just a few conglomerates. Which were able to take advantage of (small to almost non-existent) loss of chickens and voila. Price of eggs is non-elastic; that is, you can't easily replace it with other products and it is an important part of Western diet, so people didn't have a choice but to pay up.

rcktmrtn• 3 years ago

Yes, exactly. The "greedflation" label definitely has an element of truth to it, but it strikes me as misleading. Why is everything so expensive? Oh, it's greed. Guess we'll just have to either shrug and live with it or dismantle everything and go to a centrally planned economy. Greed is part of the human condition that will rear its ugly head whenever you allow individuals or groups freedom. Not something that could have been easily foreseen and dealt with by good governance.

Something like "trustflation" would be a better name. Want to reduce prices by allowing/encouraging corporations to consolidate their supply chains? Maybe that's a good short term trade off. But prepared for the inevitable trustflation when your too-big-to-fail, risk-averse monster can now hike prices as it sees fit.

fuzzfactor• 3 years ago

Why couldn’t this happen before?

That's exactly what happened before.

During the Nixon recession, leading up to the wage & price freeze.

And after the freeze was lifted, the financial power imbalance was no different so inflation went even wilder due to pent-up un-fulfilled greed among the financial leaders whom had to do without growth for a little while there.

Even though the value of the dollar was declining due to destabilization, there were less available for the majority of workers/taxpayers, but financialists still needed more of them or the math would have made them look like their greed had failed like never before. They are rewarded on greed numerically in ways that everyone else can not compare.

The freeze worked to cement the imbalance leading to the exaggerated wealth inequality we have now.

The more apparent income inequality today is minor by comparison, but they were both locked in like never before mainly by pure unchecked greed.

Freezing prices didn't help much, but freezing wages even for a little bit was completely counterproductive by setting the workers/taxpayers back many more years by comparison to capital.

Those years have grown to generations now.

octobus20216• 3 years ago

Wait... So, the companies - you know, the entities that SET the prices and exist solely to extract as much profit as they can - are the ones pushing the inflation? Nooooo! That doesn't make any sense!!!!!

jerf3• 3 years ago

"Once dismissed as a fringe theory, the idea that corporate thirst for profits drives up inflation, aka "greedflation," is now being taken more seriously by economists, policymakers and the business press."

Policymakers would like to blame inflation on greedflation. Their syncophants agree with them.

What an astonishing coincidence.

It's amazing how helpless and feckless our poor ol' policymakers are. Constantly caught out flatfooted and surprised at every turn by how bad things are. Nothing is ever their fault because they're just so shocked and surprised by how things are going.

One does find oneself wondering what exactly they're good for if they're so constantly shocked by everything.

CTRL-f was sadly missing any mention of "money supply", "printing", "interest rates", "ZIRP", or, indeed, any policy intervention made, ever, in the history of man, by policymakers. How amazing all the power they have, yet they are a flat 0% responsible. It's pretty impressive to be that constantly befuddled and flummuxed, yet have all that power, and never be responsible for anything at all, not even a little. That's a pretty impressive combination of attributes.

(Bear in mind I'm open to the possibility that it isn't 100% just the money printing, currency supply, policies, etc. The real world is complicated and policymakers aren't the only actors by a long shot, no question. But if they're truly 0% responsible, fire them, because apparently they're not doing anything. 0% responsibility is impossible.)

dragontamer6• 3 years ago

CTRL-f was sadly missing any mention of "money supply", "printing", "interest rates", "ZIRP", or, indeed, any policy intervention made, ever, in the history of man, by policymakers.

Except the largest QE was 2008, 2010, and 2012, which caused... nothing?

Anti-QE people have been claiming that QE causes problems for a decade. Eventually COVID19 causes a problem and the QE people come out of the woodwork saying "I TOLD YA SOOOOO", ignoring COVID19 entirely and trying to pretend that they've been right for a decade all along.

------------------

Policy makers get things wrong on occassion. That's cool. But the policy makers got it more correct than the "anti-QE" guys for the entirety of the 2008 through 2020 timespan. Being wrong once every decade is fine. Its better than being wrong for a whole decade and then pretending that your theories finally became correct due to unrelated factors later.

I don't expect perfection from our policymakers, nor consistency. I recognize that in a democracy, our policy makers change every 4 to 8 years and we contradict ourselves regularly. But overall, their ability to predict the future remains superior over the typical folk who cry about things like ZeroHedge.

changoplatanero• 3 years ago

Look at this graph of the money supply. https://fred.stlouisfed.org/series/M2SL#0

I see one huge jump and it wasn't in 2008

voisin2• 3 years ago

ZIRP wasn’t without inflation, it was just limited to financial assets - look at housing supply worldwide, equities, bonds, art, etc etc. This became a problem in the latest round of money printing when that inflation finally spread into CPI and affected food and other necessities (though housing is a necessity and people have been screaming about that for two decades as it continued to rocket higher…)

DoingIsLearning• 3 years ago

Except the largest QE was 2008, 2010, and 2012, which caused... nothing?

Bank Of England - 'Quarterly Bulletin' 2012 Q3

" Conclusion

[...] The benefits of loose monetary policy have not been shared equally across all individuals, however. Some individuals are likely to have been adversely affected by the direct effects of QE. Many households have received lower interest income on their deposits.

But changes in Bank Rate — not asset purchases — have been the dominant influence on the interest households receive on bank deposits and pay on bank loans. By pushing up a range of asset prices, asset purchases have boosted the value of households’ financial wealth held outside pension funds, although holdings are heavily skewed with the _top_5%_of_households_holding_40%_of_these_assets." [0]

[0] https://web.archive.org/web/20150316142619/https://www.banko...

kranke1553• 3 years ago

Joseph Stiglitz says you’re quite wrong. He’s a Nobel Prize winning economist.

https://youtu.be/4BAsZIHp9HI

Yourself ? Do you have a 58 minute lecture backed by rigorous data on why you’re so right? Or just conviction ?

karaterobot2• 3 years ago

Most of your comment is just an appeal to authority, which is a fallacy. Focus on the rigorous data part!

jerf3• 3 years ago

Joseph Stiglitz says that policymakers are just helpless people adrift on the oceans of chaos, and that we should be OK when they point at everything else because it's completely true they're never responsible for anything?

If so, he's an idiot no matter how many Nobel Prizes he has. If, as is far more likely, that's not at all what he says in those 58 minutes, you've been conveniently distracted by what is cognitively available to you from my main point, which is, if policymakers are effective, then they are responsible to a large degree. Corporate greed is a ludicrous blame shifting operation and honestly a measure of just how much responsibility they hold for what is going on in the economy right now if they're stretching for such a self-evidently stupid defense. As others have pointed out, it isn't that companies aren't greedy, it's that they have never ever ever been not greedy.

pazimzadeh• 3 years ago

Personally I hear about money printing ALL THE TIME. This is the first time I've heard a serious discussion about companies opportunistically raising prices.

enragedcacti3• 3 years ago

CTRL-f was sadly missing any mention of "money supply", "printing", "interest rates", "ZIRP", or, indeed, any policy intervention made, ever, in the history of man, by policymakers.

Do we have to "All Xs Matter" every argument? I don't read this article as making a strong claim that greedflation is the ONLY cause, just that is now being taken seriously when it was derided before. If you want an article that argues against greedflation and discusses other potential causes, you don't have to read more than three sentences before the author links you to it! The piece ends with the Chair of the Fed (i.e. a policymaker) denying profits are even "a cause" of inflation!

quantified• 3 years ago

What a bunch of strawmen. And stream of belittling with no backing evidence. If you were to put forth any, you'd need to pick actual policymakers who make the relevant policies, because "policymakers" can be found with every predilection if you want to find a quote.

zwieback• 3 years ago

Planet Money did a great episode explaining the general thinking and how this theory has become more mainstream lately, although "greedflation" is a bad moniker.

https://www.npr.org/2023/05/11/1175487806/corporate-profit-p...

notShabu• 3 years ago

I think one part of this is that it's easier to hike prices when there's a narrative of inflation because it gets lost in the noise. In quieter times, standing out with price increases drives customers to the competition.

evancox1003• 3 years ago

The "inflation allows companies to hike prices" theory is circular reasoning, because inflation IS companies hiking prices in mass and not suffering a sales losses sufficient to dissuade them form doing so.

It's absolutely true that in an inflationary environment companies hike prices preemptively. That is the phenomenon known as inflation. Missing from similar theories is any explanation of why this happens sometimes and not others.

danaris4• 3 years ago

I think the missing part is the "narrative of".

When the media is already talking about there being inflation, especially when they've been talking about it being anticipated for a while before it showed up, that makes it much easier for companies to raise prices and just say, "It's just like everyone's saying! It's just inflation! You can't blame us!"

That's not the same as saying "inflation means companies raising prices; it's tautological."

BiteCode_dev• 3 years ago

Why does it have to be one thing?

Finnucane2• 3 years ago

It isn't, and this is partly why this kind of price-gouging can go on. Company x, sees a rise of say 5 percent in material cost, 5 percent in labor cost, they raise retail prices 25 percent.

karaterobot2• 3 years ago

Did you mean to respond to someone's comment who was making this claim? The article does not make this claim.

bronycapitalims• 3 years ago

Seriously did we need a new study to explain when a minority control capital they control agency?

When a handful have the fiat currency monopoly they can buy up resources and leave less to go around.

When an industrial pipeline to make Red Bull needs machines to build machines to build machines to build cans, and the elders in charge grew up thinking in war era supply manufacturing that’s where fiat capital will be diverted.

Are these not the fundamentals principles of economics?

We’ve added so many BS layers of indirection and obscurantism via academic babble and political chicanery.

bb884• 3 years ago

There's an episode of The Problem With Jon Stewart about two months ago where he interviews Larry Summers about inflation in general and corporate profits being part of the issue. It's a real good exchange of viewpoints on the matter -- better than you'd get with most other commentary.

Relevant clip is here:

https://youtu.be/tU3rGFyN5uQ?t=232

jldugger3• 3 years ago

I recall fondly the years of Daily Show with John Stewart, and tried to watch as much of that clip as I could but I just don't think he's qualified to ask useful questions here and the adversarial dialog isn't shedding much light per second.

The standard rebuttal seems to be "are corporations greedier today than five years ago" and the likely answer seems to be no. As best I can tell, the supply shock legitimately increased prices, and the pace at which prices are reverting is slowed by profit taking. In theory, high profits should lead to more competitors entering the market, but this is either a laggy response, or stymied by interest rate increases raising the cost of capital formation.

enragedcacti3• 3 years ago

The standard rebuttal seems to be "are corporations greedier today than five years ago" and the likely answer seems to be no.

Does a dog become more greedy for food on the table when you turn your back?

A "no" answer doesn't disprove the theory because the theory is only arguing (among other things) that companies are taking advantage of an opportunity that didn't exist 5 years ago, which is consumer expectations of rising prices.

bb884• 3 years ago

> I just don't think he's qualified to ask useful questions here

I really think you don't give Stewart enough credit. Stewart is an intellectual that chooses comedy as his medium.

I think Jon Stewart wouldn't have gotten into that interview if he couldn't hold his own, intellectually. I was recently watching the Stewart/O'Reilly debates from about 10 years ago on Fox News and surprised how well both could lay out their arguments and not end up in a cacophony of noise. Stewart respected O'Reilly as much O'Reilly respected Stewart.

User23• 3 years ago

Since when is marginal pricing power a fringe theory? It’s been well known for over a century that a (near) monopoly supplier has pricing power.

Heck our entire payment system rests on it. Central banks that issue a floating currency rest their monetary policy implementation on being the monopoly supplier of reserves and thus able to set the price of money along the yield curve. Marginal pricing power is why their interventions usually don’t even have to be very large at all despite the overall huge size of the currency markets.

causality0• 3 years ago

So if prices are rising faster than costs, where is the money coming from to pay those prices? Loans? Savings accounts?

Finnucane2• 3 years ago

Debt. Since wages are generally lagging increases in costs, people are putting more on credit.

evancox1003• 3 years ago

1) Excess savings built up during COVID (part stimulus money, part reduced spending on travel, etc.)

2) "Hot" economy with low unemployment

a257• 3 years ago

In other words, companies raise prices because they can. Businesses being profit-maximizers are hardly anything new. What is novel about "greed"flation is that it introduces the notion that companies are taking advantage of people's expectations that prices will rise, causing inflation. The question is, is this a short-term phenomena (as with most inefficiencies caused by information asymmetries), or will these abnormal increases last? it's hard to say, as it is dealing with behavioral economics.

lucidguppy• 3 years ago

Downward price pressure from competition only works when there's competition - not monopoly or monopsony.

prepend5• 3 years ago

Is there monopoly on groceries? There’s much consolidation in agriculture, but I’m supposed to believe that ConAgra is in cahoots with my local farmers market to both use their monopsony powers to increase everything? Including what’s grown locally?

frankreyes• 3 years ago

Charts #6 and #7 are the most important charts that hardly anyone is looking at these days. What they show is that our recent surge in inflation was caused by a surge in deficit spending from 2020 through 2021. As much as $6 trillion of Covid "emergency" spending was effectively monetized, as it accumulated in the nation's savings and deposit accounts (M2).

https://scottgrannis.blogspot.com/2023/05/inflation-is-so-ov...

credit_guy• 3 years ago

Inflation is due as much to the greed of the sellers as to the willingness of the buyers to part with their money. For most things that we buy we have options. Restaurant prices are too high? You can cook and eat at home. Resorts in Cancun too expensive? You can vacation locally. Tickets to the movie theater more than $20 apiece? Netflix is your friend. Etc, etc.

snapplebobapple• 3 years ago

The failure at trust bustng causing decreased competition and more market power is one part of why this is questionable. The other shoe that hasn't really dropped in this conversation is that companies hate increasing prices so the game is often to raise prices more a few times rather than many times but for smaller amounts. We will need to look back on this whole price and profit move over the whole government caused supply and demand shock to see if profits are below normal later and somewhat cancel out higher profits now to know if this is happening.

To say greed is causing inflation rather than greed is a response to a government caused supply and demand shock is really questionable to me though. It takes away from the major role of bad government policy in the root causes of this situation and puts it on companies responding as profit maximizers (as they always should be) to government created aituations.

Once a fringe theory, “greedflation” gets its due

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