Greedflation and its counter arguments: how consumers ultimately decide prices Premium

Many economists have questioned the validity of the argument that corporate thirst for higher profits is the cause behind inflation

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Greedflation refers to price inflation caused by corporate greed for high profits. Progressives in the United States have accused corporate greed as a major reason for the historically high price inflation in the U.S. since the pandemic. The proponents of the idea of greedflation argue that corporate profit margins have risen significantly since the pandemic even though the larger economy has struggled and that this has contributed to high inflation. They contend that the U.S. corporations have allegedly increased the prices of their goods by more than what was necessary to compensate for higher input costs caused by supply-chain bottlenecks.

Proponents of the greedflation theory of inflation see this as a sign of increased market dominance by corporations, and have called for efforts to rein in market power of large corporations and some have even advocated for a ban on price hikes to prevent “profiteering”.

Questioning the narrative

Many economists, however, have questioned the validity of the argument that corporate thirst for higher profits is the cause behind inflation. They see greedflation as a political narrative built around the issue of inflation rather than as a serious economic explanation of high inflation since the pandemic.

Economists who disagree with the greedflation narrative argue that businesses, whether they are large corporations or small companies, cannot arbitrarily set prices as many people seem to erroneously believe. Businesses set prices for their products based on what consumers would be willing to pay for these products. In other words, businesses cannot force consumers to pay a certain price for their goods; they can only try to gauge the maximum price that consumers would be willing to pay and set prices accordingly in order to maximise their profits. If a business sets the price of its product too high, this would cause its goods to go unsold and the business would have no choice but to lower the price of its product to clear its unsold stock.

In short, while businesses have the freedom to raise or lower the prices of their products, it is ultimately consumers who determine the price of any product in the market. So be the case, it may not be sound to argue that corporate greed is behind the rise in inflation.

The primacy of consumers

Moreover, inflation refers to a general rise in the price level (meaning a widespread rise in the prices of goods and services across the broader economy) rather than in the prices of individual goods and services. The only way corporations can influence the overall price level is by reducing the supply of goods and services. There is, however, no evidence to suggest that there has been a deliberate reduction in the output of U.S. corporations recently. Even if corporations cut down their output, the drop in output is likely to be temporary as other suppliers would rush to meet the demand.

It is thus extremely unlikely that U.S. corporations caused prices to rise across the board in recent years by somehow adversely influencing the aggregate supply of goods.

The current bout of high inflation in the U.S., most economists believe, is much better explained by the U.S. Federal Reserve’s expansionary monetary policy during the pandemic which put more money in the hands of U.S. consumers, who in turn have bid up the prices of goods and services in the economy. The U.S. money supply rose by a whopping 40% in the wake of the pandemic and this combined with supply-chain bottlenecks caused by stringent lockdowns led to high inflation.

Where did the profits come from?

Economists have also pointed out that the cost of inputs used by businesses has risen at a faster pace than the pace at which the prices of consumer goods have risen. In such a climate, the rise in the profit margins of corporations has come as a surprise. It should be noted, however, that corporations represent just a tiny share of the total number of businesses in the U.S. economy, so their rising profit margins may not present a true picture of the health of businesses in the wider economy. In fact, it could well be the case that large U.S. corporations benefited from the demise of smaller businesses during the pandemic by capturing more of their market share.

While this suggests that the market dominance of U.S. corporations may have risen considerably, particularly since rising profit margins could possibly be a sign of weakening competition among businesses, it still does not mean that rising profit margins are the reason behind high inflation. As noted earlier, prices are ultimately determined by buyers and not by sellers.

Greedflation has been compared to other theories of “cost-push” inflation which attribute inflation to a rise in input costs. For example, in the past, a rise in the wages demanded by workers has been blamed for the rise in the prices of goods and services. In the case of greedflation, it is the rise in the corporate thirst for profits that is seen as a cost that is driving up prices.

A criticism of the cost-push theory of inflation has been that it ignores the fact that the cost of producing any good is itself determined indirectly, but ultimately, by consumers. It should be noted that the cost of inputs, which can be used towards different alternative ends of society, is determined by competitive bidding in the market.