Is Greedflation really happening? I explain the possible effects on us.
As a highly debated topic, the answer involves asking what are the major factors contributing to some of the highest inflation we’ve seen in 40 years? Because Consumer Price Index (CPI) Inflation just hit 9.1% in June 2022 with barely any sign of peaking.
Is it corporate greed or concentrated market power that’s contributing so much to inflation? The answer’s not so simple because there could be thousands of factors making inflation as high as it is today.
We also have to ask, what is being done to try to bring down inflation? I’m sure it’s hurting all of our wallets and I have some suggestions as to what we can do. Let’s kick inflation’s butt!
Greedflation is when companies are exploiting situations of high demand and low supply by excessively raising prices AKA price gouging in order to maximize profits.
This could have been happening in some industries, such as in shipping, where a container from Asia to California used to only cost $1,400 to $3,000 and then over the last two years went as high as $32,000 per container. Shipping containers now cost around $7,500 to $10,000, which is still 5 times as much as it used to cost.
The fact that shipping container prices have skyrocketed so much is definitely a worrying concern because this could have downstream effects in causing all other traded goods to go up in price.
One example is used car prices skyrocketing by 40%+, and this is partially a result of a chip shortage. New chips couldn’t go into new cars, and less new cars were being shipped into the US (possibly because of both high shipping costs and the chip shortage), and this led to a shortage of cars, which caused the prices of used cars going up.
Maybe some companies in the shipping industry could have taken advantage of the supply chain disruptions, but they may not necessarily have done so with many supply chain issues going on.
And with workers not being as available, maybe some shipping companies had to raise wages to get workers to work on the docks and truckers to move the backed up supplies out to the states.
Who knows if the shipping container prices were really justified, but once things calm down, then the prices start normalizing because it’s not sustainable for companies to pay $30,000 for a shipping container.
Eventually they’ll stop paying that price, and wait until the price lowers to a more affordable amount.
We could be seeing that now, but we’re still off normal levels of what shipping containers used to cost in 2019.
And while some industries like shipping and oil and gas have been reaching record highs lately, some of this is part of a larger trend of corporations increasing profit margins over the last 15 years.
The historical average had been 5% of profit margins, and now it averages 10%. In the last couple of years, profit margins have been reaching between 11-12% on average if we look at corporate profits after tax over GDP.
Maybe companies want to generate more profits now to use for growth initiatives or maybe they were really leveraged in using cheap debt to juice returns while they still could before inflation erodes their returns.
With more inflation, you need to earn more money in order to just overcome the effect of inflation.
Maybe profit margins weren’t as big before the pandemic because companies would squeeze their suppliers and resist increasing employee wages in order to keep price levels a bit more down. But with government stimulus support, that might’ve caused some companies to raise wages just to entice workers to come back.
This could all be part of an inflation-wage-price spiral where the more that workers are demanding higher pay, then that has to go into companies’ expenses when making products and services.
But then there’s also evidence according to the Economic Policy Institute that estimated that 54% of price increases since mid-2020 can be attributed to “fatter profit margins” compared to just 11% in the 40 years before.
And even though we’re paying 250% more for gasoline now with $5+/gal vs $2/gal in 2020, for the sake of argument, lets give the oil and gas companies the benefit of the doubt that they’re still catching up to overwhelmingly repressed consumer demand because it’s not easy to just restart massive production after having been shut down or reduced in operation in 2020/2021. Nonetheless we’re all paying the price now for pumping the crude oil out of the ground.
Even if oil and gas supplies go back to something resembling normal but still elevated, we should focus on the things we can control like driving less while biking and walking more, or carpooling. And finding ways that we’re not in as much need of gasoline or energy as we were before.
There could be both positive demand shocks with repressed consumer spending and negative supply shocks with the Ukraine conflict and China lockdowns going on.
Even though people could be totally taking advantage of the supply chain situation being out of whack, and companies could be passing on higher input costs to consumers having to pay more for the same (or less) goods and services, eventually they will also take a hit to profits. It’s not a win win for anybody the more that inflation remains out of control.
This is part of why some argue against the concept of greedflation as they say that corporations didn’t suddenly decide to be more greedy than they were in 2019 — they’ve always been greedy, perhaps.
Nobody is necessarily to blame, except maybe for those who realized they could get way more in selling or renting their homes than a few years ago like with house prices going up 20% or rents going up 17%.
But eventually consumers will be wiser and realize they don’t need to spend as much as when supply seemed really scarce.
One argument in favor of greedflation happening is that per Boston Fed research, there’s been increasing industry concentration that’s contributed to accelerating inflationary pressures resulting from tight labor conditions and supply shortages.
Maybe some companies gained some monopoly or oligopoly power to pass on higher prices onto consumers since their smaller competitors couldn’t stay in business or there’s been more mergers and acquisitions making some corporations stronger and limiting the choices to consumers.
For example, maybe only Coke and Pepsi have strong enough market power that they’re able to raise prices way more than Shasta can. Because if you’re really thirsty on a 95 degree day, you might not reach for Shasta as you would a Pepsi.
But there’s a limit to how much consumers are willing to pay, even for companies that have monopolistic power.
So the main course of action we have is to either stop buying higher priced products, or opt for lower cost ones like grocery store label brands rather than name brands.
Hopefully the effects of inflation will normalize with The Fed doing Quantitative Tightening (taking away money printing stimulus), as long as they stick with QT long enough to actually make inflation go back to the 2-3% target average. The only catch is we’re likely headed for a recession, which would be hugely deflationary as consumer spending taps out too.
As consumers, we always have the power to not spend money. As tempting as a cold Coke might be, maybe we opt for healthier choices like ice water with lemon and call it a day.
So what do you think of greedflation? Have you seen it in action?
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