In today's uncertain economic climate, high inflation has many wondering: who or what is to blame?
Many point to “greedflation”, a recent term making the rounds that suggests the root cause of inflationary pressures is corporate greed. The term emerged as a reaction to theories that inflation is a result of skyrocketing wages.
But is corporate greed the primary catalyst of rising inflation?
Differentiating between genuine corporate necessities and opportunistic price hikes is not simple task.
There is a divide where many economists attribute post-COVID inflation to supply-demand imbalances, caused by pandemic-induced supply chain issues and increased consumer spending from relief funds. In contrast, many equate inflation primarily to corporate profiteering, with concentration of corporate power leading to unchecked price hikes.
Many people, particularly in Europe, consider businesses that seek high profits to be the villains behind inflation, and with profit hikes accounting for nearly half of the Eurozone's inflation increase, according to the International Monetary Fund (IMF) that’s a reasonable train of thought.
Yet the US provides a counter-narrative. Despite soaring consumer prices, corporate profits in America are shrinking. In the first quarter of 2023, profit margins were back down to pre-COVID levels, even as inflation persisted, albeit at a decelerating pace.
Even so, “CEOs claim outside forces made them gouge consumers, then turn around and give themselves raises and boast of record profits and billions in new investor handouts,” as observed by Liz Zelnick, director of US consumer-advocacy group Accountable.
Many US companies have acknowledged raising prices, even as inflation readings recede and as some acknowledge that their input costs are falling.
This practice appears to prioritise executive benefits over consumer interests, with companies justifying price hikes amidst record profits and substantial investor payouts.
Consider Procter & Gamble (NYSE:PG) Co., which blew past earnings estimates in the latest quarter after raising prices by up to 9%, on top of price rises of up to 10% in the previous quarter. The price hikes were largely behind an increase in gross margin of 3.8% from a year ago, driven by 3.4% from pricing benefit. Chief Executive Jon Moeller acknowledged that pricing has been positive contributor to top-line growth and signalled that even more price increases are to come.
However, consumer sensitivity to elevated prices is also evident. Campbell Soup Co. observed reduced volumes as shoppers reacted to elevated prices, while Kraft Heinz Co (NASDAQ:KHC)., said it remains committed to protecting profit margins, despite losing market share due to aggressive price hikes.
Inflation, corporate interests and consumer welfare
Inflation fears traditionally revolved around wage-price spirals. However, recent inflationary trends have seen wages lagging price hikes, complicating the sole blame on corporate actions. In the US, the surge in profits of non-financial corporations links back to fiscal stimuli and direct payments during the pandemic.
This cash influx boosted consumer spending, burdened global supply chains, and naturally led to profit growth. Geopolitical events, like Russia's intervention in Ukraine, have only intensified the shortages, pushing up energy and food costs.
Europe hasn't mirrored the US's economic fervour, but indications of inflation, high profits, and a tight labour market have surfaced. Despite the justified nature of price hikes in response to shortages, European Central Bank President, Christine Lagarde, advocates for a reduction in Eurozone profit margins to balance inflation.
To achieve this many experts say we must first address economic stimuli, suggesting remedies like further interest rate hikes, rather than clamping down on corporate greed. And even with inflation having recently pulled back in certain regions, many companies have continued to raise prices, even as their input costs are falling.
Balancing corporate interests with consumer welfare is a challenging tightrope walk. Companies haven’t suddenly become more profit-driven, yet unchecked inflation disproportionately affects workers which underscores the need for policymakers to prioritise price stability from the outset.