Greedflation

By Shlomo Maital

     Greedflation!  Inflation caused by greed of profit-hungry CEO’s, who raise prices virtually together, against the anti-cartel laws, simply because…they can. 

     I retired from active teaching and research in Economics years ago and have been reluctant to weigh in against what I sensed was rear-view mirror Economics – interpreting today’s inflation woes using obsolete paradigms of the past.  As a pensioner, sitting in the nose-bleed cheap seats, who am I to challenge those actively playing on the field? Inflation? Simple. Excess demand. Squeeze it with higher interest rates. Thus, say economists.

    And at last!  The Lone Ranger, or, actually, the host of NPR’s On Point podcast Meghna Chakrabarti, who did her homework diligently and brings us Prof. Isabella M. Weber and her brilliant paper with co-author Even Wasner, on Greedflation (actually, “Sellers inflation, profits and conflict: Why can large firms hike prices in an emergency? Review of Keynesian Economics, Summer 2023). 

    Weber says it clearly.  “The US COVID-19 inflation is predominantly a sellers’ inflation that derives from microeconomic origins, namely the ability of firms with market power to hike prices.”

      Normally, firms hesitate to hike prices because if competitors fail to do the same, they lose.  But, Weber observes, “[hiking prices] requires an implicit agreement which can be coordinated by sector-wide cost shocks and supply bottlenecks.”  In other words:  Initial supply shocks lead to price hikes, and even when those shocks resolve, firms continue to raise prices together, because they can, buyers seem resigned to it. 

    “Such sellers’ inflation generates a general price rise which may be transitory, but can also lead to self-sustaining inflationary spirals under certain conditions.”  And self-sustaining, it has indeed become.

    “Until recently,” Weber notes, “it was considered heretical to point to a possible relationship between the first signs of a profit explosion and sharp price increases.”

      Heretical!!!!???   If profits soar, prime facie, businesses are not recouping higher costs but are greedily snatching obscene profits, raising prices beyond what is fair or reasonable.  Weber’s graph shows US corporate after-tax profits as a % of value added were steady at a reasonable 10%, from 2005 through 2020 – and are now ranging between 15% and 20%.  In 2021, Weber observes,  U.S. profit margins reached levels not seen since the aftermath of the Second World War!

    Many people suffered from the impact of COVID.  Businesses made it a whole lot worse. And post-COVID, the greedflation is continuing and perhaps even growing worse.

    Why?  The alibi.  Cost inflation.  The accomplices.  We the people, emerging from lockdown and eager to spend.  Buying the false claim of businesses, that they have to charge more, because it costs more to make stuff.  Government — impotent at enforcing laws against anti-trust, monopolies, and cartels for decades.  Economists – unable to see the handwriting on the wall, unable to blow the whistle.   The Fed —  way too late to see that inflation was becoming chronic, doggedly continuing to raise interest rates even when it is apparent that is not doing anything except risking a recession, all this to avoid admitting they were wrong and misguided even when it is obvious they were. 

     A few saw the slight.  Albert Edwards, global strategist at the French bank Societe Generale, confessed:  “How wrong I was to assume that margins would have declined by the end of last year. … supernormal profit margins are a big issue for policy makers that simply cannot be ignored any longer.”

     And talk about banks?   The Financial Times reported that   “Profits in the US banking sector reached an all-time high of roughly $80 b. in the first quarter of 2023, up 33 per cent from a year ago, even as the industry contended with the aftermath of two bank failures and the most significant stress since the 2008 financial crisis.” 

     Thanks, Fed.  Your interest-rate hikes have done nothing to half inflation, but instead have given windfall profits to banks and businesses, at the expense of the middle-class who struggle to pay their monthly mortgages, costlier every month.

      This is not the first time mainstream Economics has led public policy astray.  And it won’t be the last.  The rearview mirror is a dangerous place to focus on, when your Mercedes is hurtling down the turnpike at 120 mph. 

     Look around you.  See what is ahead.  And respond in time.  Because our wellbeing depends on it.