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.
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According to Paul Hannon of The Wall Street Journal, most economists believe profits have played a larger role in the post-COVID-19 inflationary episode than during the period of inflation that had occurred in the 1970s, although the issue of precisely to what degree has proven controversial and a point of contention.[2] Organizations and notable people that have expressed concern about inflation alleged to have resulted from outsized or unusually high corporate profits include the International Monetary Fund (IMF), the European Central Bank (ECB), Federal Trade Commission (FTC), Isabella Weber, Paul Donovan, and Robert Reich. Some proposed remedies include pursuing anti-trust enforcement, windfall profit taxes, and anti-price gouging measures like price caps. Organizations and notable people who dispute the concept include The Economist while others who think greedflation exists but is not as significant include CNN, Justin Wolfers, Jason Furman, and Noah Smith.
Definitions
The term "greedflation" was a candidate for word of the year for the Collins English Dictionary in 2023,[3][4] and was added to Dictionary.com in 2024.[5][6] Collins Dictionary defines it as either "the use of inflation as an excuse to raise prices to artificially high levels in order to increase corporate profits" or "an increase in the price of goods and services caused by businesses increasing their prices by more than their costs have risen".[3][7]
History
In the wake of the COVID-19 pandemic, inflation increased significantly as did discussion of the role of corporate profits in that increase.[8][9] Proponents of the theory pointed to data showing that corporate profits outpaced inflation.[8] Economists interviewed by PolitiFact believe rising costs of goods, labor, and real estate are bigger drivers of inflation than corporate profits.[8] Combatting inflation by ensuring corporations are not taking excessive profits was cited by some Democrats ahead of the 2024 United States elections.[10][11]
Mechanisms
Summarize
Perspective
Monopoly power
Economists and politicians argue that the market concentration that occurred in the early 21st century in some major industries, especially retailing, has given companies the ability to wield near-monopolistic pricing power.[12] 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]
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,[14] as well as their higher prices in neighborhoods with less competition.[15][16][17][18][19] The meat industry in the United States has also 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.[20] Many economists, according to the New York Times in 2022, responded by observing that if these large corporations had so much market power, they could have used it to increase prices at any time, regardless of the COVID-19 pandemic.[12]
Information asymmetry
In the inflationary environment, everybody knows that prices are increasing. Obviously that's a great opportunity for every firm to realign their prices as much as they can. You're not going to have an opportunity again like this for a long time.[21]
—Z. John Zhang, a professor of marketing at the Wharton School at the University of Pennsylvania
Some economists and professors, such as Paul Donovan,[22] Isabella Weber, Albert Edwards,[23] and Z. John Zhang,[12] argue 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.[24]
Ernie Tedeschi argues that every realistic economist would agree that in the short-run, there is not perfect competition which can lead to higher profits due to consumers being less informed than the businesses but does not believe the effect is large or lasting.[25] Weber argues that the increased prices in the short-run can also lead to longer-run price increases by activating the wage-price spiral and increasing inflation expectations.[25] In August 2024, the Associated Press reported that greedflation was easing as consumers become more discriminating.[26]
Proposed remedies
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Perspective
Antitrust enforcement
The FTC 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.[13] 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.[27]
Windfall profit taxes
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 United Kingdom 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 2022, 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.[34] 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.[35] They argue that the taxes should always target a clear measure of excess profits and not be tied to price levels or revenue.[35] Other notable supporters include Joseph Stiglitz and Isabella Weber,[36][37] among other economists.[38][39][40]
Anti-price gouging laws
Eric Levitz argues that these laws are worth pursuing regardless of whether greedflation is a major factor or not.[34] 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.[41][37]
Price caps
Isabella Weber and her colleagues argue for price caps.[41][37] Paul Krugman changed his mind and expressed interest in adding price caps to the toolkit to flight inflation.[41] CNN argued against price caps.[42]
Economic analysis
Summarize
Perspective
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.[43][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][42]
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[44]
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.[45][24][12][46] Justin Wolfers, an economist at the University of Michigan, quotes Jason Furman, who served as chair of the Council of Economic Advisers under U.S. president Barack 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."[dubious – discuss][47] Wolfers states that "companies will always charge the highest prices possible, but that competition keeps prices in check".[dubious – discuss][47]
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.[48]
Economists' support
In the United States, some Democratic politicians,[45][46] as well as other observers, have contended that price gouging or "greedflation" exacerbated the inflation surge in the United States.[45][24][12] Robert Reich argued that though price gouging is not the main cause of inflation, there is a lot of evidence it is aggravating the situation.[46] 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.[49][50] 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.[51]
Profit margins
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.[52][53] Economists at the University of Massachusetts Amherst found that in 2022 profit margins of U.S. companies reached their highest level since the aftermath of World War II.[50] ECB 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] An IMF 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.[55]
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.[56] 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%.[57] 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]
Grocery prices
An analysis published in early 2024 by the White House Council of Economic Advisers found that U.S. 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, although margins for other types of retailers had fallen back to historical levels. President 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.[58][59][60][61] In 2024, Ernie Tedeschi argued that no more than one-fourth of the grocery inflation in the U.S. during COVID could be attributed to greedflation.[25]
Motor vehicle prices
An analysis published in May 2023 by The New York Times found that U.S. 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.[62] 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.[41] In July 2023, Eric Levitz in Intelligencer contested the idea that greedflation was a significant factor in post-pandemic inflation, observing that many of the studies rely on correlation not causation. He also cited 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;[34] however, he found 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.[34]
See also
- Lina Khan - chair of the Federal Trade Commission (FTC)
- Vimes Boots Index (VBI) - a proposed measure to assess the disproportionate impact of inflation and supermarket pricing practices on the poor
References
External links
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