For those wondering if it's truly representative, it's estimated that 50% of the inflation in Europe is due to margin increase not bc of the inflation itself.
https://www.imf.org/en/Blogs/Articles/2023/06/26/europes-inf...
https://www.imf.org/en/Blogs/Articles/2023/06/26/europes-inf...
For example, in 2020 there was a huge increase in demand for used cars, and the price of used cars increased by ~40% within a few months. But people who sold used cars did not have their costs increase - they were, after all, selling an already completed product. The IMF would therefore estimate that between 2019 and 2020, ~100% of inflation in used car prices was due to margin increases rather than inflation itself.
This is obviously silly - the increase in prices was because there were too many buyers and too few cars, not because the owners of used cars suddenly because significantly more greedy overnight. It's the same with corporate profits. Inflation has distributional effects which are interesting to study, but we shouldn't confuse ourselves by claiming that the effects are actually the causes.
If I know this, I suspect the IMF does too, and incorporated that into the report.
You’re comparing the concept of economy-wide inflation with the basic supply-demand economics for one item.
LMAO no. It's foolish to equate an individual selling a single asset like a car with businesses that can range from little niche supply workshops up to dominating whole industries. Pure laws of supply and demand only hold true under conditions of perfect competition, and much of what we call 'business' is about playing the meta-game - out maneuvering competitors financially, creating moats and other barriers to entry to keep competitors out of a market sector, using marketing to maximize product differentiation and shape consumer perception, leveraging regulatory complexity in one's favor or lobbying for it to be reduced in order to gain some cost advantage.
Real world markets are a lot more complex than the little toy ones used to explain fundamental economic concepts.
I demonstrated this with an example, where we know what caused a price change (supply chain issues for a substitute product plus increased demand) and know the distributional effect (higher margins for sellers of used cars). If we naively try to explain the price change based on the distributional effect, we would claim that higher prices were purely caused by increased greed. We know this to be false.
Look, perhaps companies really did become more greedy in 2020 and that's what has really caused inflation. Or maybe large amounts of stimulus caused increased demand. Or perhaps the war in Ukraine has caused supply chain issues which drives up prices. My point is that looking at the distributional effects of inflation is just completely disconnected from the question of what caused inflation in the first place.
At the very least, if you're claiming that we can figure out what caused inflation by looking at the distributional effects, can you provide some evidence, or some argument, to support that claim? Because I think my example demonstrates that common sense ("X benefitted from inflation, therefore X caused inflation") is not a good guide here, and if anything, the additional complexity of real markets works against you here - if we can't even explain inflation based on distributional effects in a toy market, what makes you so confident we can do so in the market as a whole?
But for many consumer goods, manufacturers have exploited the perception of inflation to increase prices or (as highlighted in the source article) to shrink package volumes while retaining the same price point. It's much less clear that supply is the driver here; bear in mind the fact that moving to smaller package sizes often imposes considerable overhead as whole production lines need to be retooled, new package containers designed and manufactured etc. It's not a passive response to market phenomena, it's a straightforward investment in the idea of giving consumers less value for their money.
While I don't disagree that government policy and economic shocks can often be inflationary without any intention on the part of the business community to drive prices up, consider too that sometimes there is such intent and organizations like the Chamber of Commerce exist largely to beg for support from the public purse in hard times and deflect criticism onto whatever scapegoats are convenient in good times.
No it’s literally greed. You can choose to not raise the price of your used car when you sell it. “Market price” is a hallucination that you can ignore. You’re not forced to go along with it. As you said, sellers of used cars didn’t have their cost increase, so what was the forcing function for price increases except greed?
Which brings me to corporate profits…
It's a powerful signal containing important information! You don't have to go along with it, but it may be beneficial to others if you do.
As an example, we bought a new car in 2019. We were planning to sell our old car but every time we were about to sell it, it came in handy - family came to town and we needed two cars, or it was nice to be able to go two places at once.
In 2020, prices shot up. Suddenly, it was worth it to sell the car.
Someone who valued it more than us got to use the vehicle. Was that greed?
You sold it because you could get more money for it. That’s what greed is - you chose more money. You could make the case that you weren’t behaving immorally -not everything in life has to be a charity- but you acted out of a selfish desire for more money.
I’d also argue that “value it more” is pretty flimsy. Yes in a shortage the buyer clearly needed a car and was willing to spend more to acquire it instead of waiting for prices to drop. But you clearly didn’t value it beyond the 2019 price based on your stated desire to sell then, it was just an inconvenient transaction.
If "following market price signals to decide what to produce and sell" is greed, then EVERYTHING is greed.
You make clothes on Etsy, and suddenly people will pay more for silver clothes because Beyonce tells her fans to wear silver. So you make more silver clothes, and sell them for more money to more happy buyers… greedy you!
You have a shelf full of books. One of them is signed by a famous author. It's cool to have it as a conversation piece. That author dies, and suddenly the book is worth enough to pay for some needed home repairs. So you sell it… greedy you!
Didn't they? Increased demand for used cars should mean that used car buyers are forced to pay more for the same car than they would previously. Maybe it's lagging by a bit, but I would absolutely expect that their costs would go up.
From the article you linked: "Profits (adjusted for inflation) were about 1 percent above their pre-pandemic level in the first quarter of this year."
[1] https://finance.yahoo.com/quote/CA.PA/financials?p=CA.PA
Isn't this exactly why we should buy into this narrative? The manufacturers increased their margins, so Carrefour sells more expensive, but in the end gets the same total profit.
Smart businesses don't wait until they start losing money to make adjustments. They plan ahead. These "margin increases" are literally increases due to inflation which will companies expect to take hold over the next 1-2 years. There could be a variety of factors for this. One such example is corporate bonds rolling over to new interest rates which are expected to start happening en masse very soon.
This might be a really, really stupid question, but aren't corporate decisions sort of the economy?
I'll buy the media narrative this time, thank you.
Meanwhile, they've both reported their highest ever company profits. :(
So, clearly they're full of shit about the cost of goods being the cause rather than their own price gouging.
If the value of the Australian dollar halves, then a company doubling it's raw profit figures is really just staying maintaining the same profits in real value.
Why would their "maintaining the same profits in real value" be acceptable when no-one else in the end to end chain (producers, customers, etc) managed to in the situation.
Again, if the value of currency halves and profits in raw curry terms doubles then profit in terms of real value has remained the same. If a company pays it's employees $30 and the value of currency halves, and it raises wages to $45 did they really raise wages? In raw terms, yes, but in real terms no. The value of wages has actually gone down.
The problem in Austrialia is a lack of competition, hence Woolworths can get a 5.9% profit compared with say Tesco in the UK with 3.8% profit (the UK having far more competition)
Not only that but while demand is decreasing, profits are increasing. That's a ridiculous system and shows a broken market.
Too few people spread too far apart.
Explain ALDI?
Smart.
In terms of labor and wages, it's called a wage price spiral: https://en.m.wikipedia.org/wiki/Wage-price_spiral
Similar dynamics exist for physical goods.
>Do not buy into that narrative.
Would you mind sharing the data? I've done a quick search, but I can't confirm what you said.
I found this, which contradicts what you said, but Statista is not super reliable: https://www.statista.com/statistics/1116200/australia-net-pr...
But even if it's true, and they recorded the largest profits, the catalyst still is the monetary policy. If businesses could just price gauge their clients, they would have already done it before. The goal of a corporation has always been to maximize utility, and this hasn't suddenly changed; so ask yourself, why are they raising prices now.
You can't think of any major global event that happened since 2020 that may work as a "distraction" and a cover while businesses engage in monopolistic/anti-competitive behavior?
There are obvious financial cost increases that have happened which are falsely represented as 'profit' in this analysis.
Worse, is it’s never been easier to collude. It used to be you had to pay a big consulting firm big money for them to tell you “current market rates” for many goods and services. Now you can just subscribe to same SaaS everyone in your industry uses and have it tell you how much to charge. This tends to help break out of a prisoner’s dilemma.
This was something I never quite anticipated. I used the intenet when it was young to help do price discovery and find better deals. Never occurred to me the end game was for companies to do it even better for pricing. Even after seeing thrift store pricing adjust due to seeing online prices on ebay, it didn’t occur to me the scale it would happen elsewhere.
There is no collusion here and this has jack shit to do with mergers. If those were the causes, inflation would have been a crisis 10 years ago.
Everyone raises prices to increase profits, increasing inflation, that increases prices further...
I don't understand why people are so happy to blame governments and treat companies, in which profit is their raison d'être, as if they're only "reacting to the government".
Of course both are to blame, but let's stop pretending companies are victims while record profits are seen everywhere (adjusted to inflation). Many (if not most) are clearly taking advantage of this exact sentiment against the government to pocket even more profit. It's not me, it's the inflation!
I don't see how the frequency changes my assertion though. That's the regular boom/bust cycle from capitalism. There are many theories on why that happens but the fact is: they happen.
I hope this time it will be corrected... permanently.
This is a very shallow look at economic forces. And ignores some of the bigger squeezes happening. The number of landlords continues to decline as real estate is consolidated in fewer hands. And worse, the number of landlords that abdicate their roles to real estate management companies grows every year, and the percentage of properties in an area run by a given management company continues to grow as well. This creates a level of “collusion” that didn’t really exist 30 years ago.
Our current market abhors competition, and regulators and courts have increasingly sided with the bigger business.
Inflation was a huge problem 10 years ago. It’s why I stopped renting.
Roughly half. Nearly all of the locally owned ones.
>Inflation was a huge problem 10 years ago. It’s why I stopped renting.
No it wasn’t. At least not by any quantitative measures.
So, the inflation story is most certainly a lie. The businesses started to charge more because they had an excuse in (a minor) supply shock and fuel price rises. But it's just that, an excuse. Worst case pure inflation is about 10% while the increases are... a lot. Especially in some sectors.
The situation is "so bad" for some corporations they're instituting stock buybacks. :) So stockholders are getting rich.
This is not some corporate conspiracy. The fed’s comments on inflation have made it very clear there is a labor shortage in the services sector that is driving up costs there quickly.
Starting hourly rates at these restaurants are now $20/hr, up from $15 a couple of years ago, and that’s still not enough. Each one of them has hiring signs and is clearly short staffed.
Sure there is inflation, but maybe those companies keep sending excel files to each-others department and keep increasing prices multiple times more than needed.
The real answer is that when inflation is happening, it provides an easy excuse for raising prices far beyond the cost of your inputs. Everyone expects prices to go up, so they don't balk at yours going up faster than inflation.
It's one of those simple macro-econ models that sound good, but never play out in real life because humans aren't calculators. The reality is a mix of both, probably more of your explanation.
Critically higher profit margins doesn’t necessarily translate to higher profits because you’re selling fewer goods.
Remember, prices generally are a function of the cost the market will bear. If the general public will pay more for something, why not rise the price? If everyone is rising their prices at the same time, you have less pressure to compete on prices.
Optimum Y is not related to X, but the price when you replace the stock. ( let's say X2 ) When supply has problems, or economy is unpredictable, it is harder to predict X2, so usually your estimation is a bit off.
So you have to have bigger margin to cover for this estimation error. ( assume the worst )
(Yes, equilibrium economics is a joke even when law of big numbers is involved.)
For example, if there's a natural disaster, and the people in power aren't dumb, they'll let prices float instead of putting caps in place, and everyone will be incentivised to rent big trucks full of water bottles and sell it for 20-50x the normal price. For the affected people it makes sense because now they can drink water, and if the prices were controlled nobody would make the drive. Eventually enough people do the drive or the disaster passes and prices normalize.
At the moment it's hard to explain what is happening but it might be more complex than just "nothing to see here". I've come to realize that reality is more nuanced than Milton Friedman made it out to be (and he did too later in life).
It’s possible your point does apply to normal price shifts when supply for something like electronics becomes constrained but right now your example detracts from understanding that.
Some are smart psycopaths. The issue isn't dumb in power but dumb people voting. People get outraged by price gouging so populists create laws against it. Even though those laws don't make economic sense they make political sense.
Most of the time IMO state agents will just ignore price gouging because they know it is a necessary evil but if the need arises they can always intervene in prices, say they are doing something and save face. But this destroys the economy if done often. It's not black and white.
What does not make sense is a world where people have to buy disaster issuance just to make sure they can afford water when a hurricane strikes.
I think most states that experience natural disasters have price gouging laws that make it illegal to raise prices, during a declared emergency, beyond the level required by increased costs.
Or at least I know Louisiana[1] and California[2] do.
And here in Louisiana we've had a lot of disasters and it generally works (sometimes gouging still happens).
[1] https://legis.la.gov/legis/Law.aspx?d=85680
[2] https://leginfo.legislature.ca.gov/faces/codes_displaySectio...
In my opinion, disasters that have some level of predictability (hurricanes are the best example) shouldn't have price gouging laws. If you were allowed to raise your prices arbitrarily high, and you knew a hurricane was coming, what would you do? Bring in as many of the goods as you thought you could get higher prices for as you could. This results in an equilibrium where lots more water, food, batteries, etc. gets brought in, prices rise only somewhat, and no law is necessary.
Now, I agree that for disasters that aren't forseeable (like earthquakes), you lose the signalling value, so I'm more amenable to it.
Sure, some shelves might be bare the day before the storm but that doesn't mean people aren't prepared, that they aren't able to get the things they need, or that the current method does not work.
And when the power is out for a week+ for a whole region (goes beyond the supplies urban locals typically prepare) then government uses the national guard to hand out MREs and/or bottled water in commercial parking lots. This is very rare.
I remember a study on New York following Hurricane Sandy. Fuel was out. Drugs were supplied. Because nobody was incentivised to bring in extra fuel before the hurricane hit; there was no margin to incentivise it. But there was an incentive to bring in drugs, because dealers could make a killing selling at a premium.
Price-gouging laws are the price of keeping the peace with a population illiterate in basic economics. (And in any case, there is always a black market in play.)
Sometimes they have backup power or power companies prioritize them. In the south, local media will help notify which gas stations are operable. More fuel won't solve that problem.
For Sandy they had more issues than just pumps without power. 40% of their supply was reduced before the storm even hit from shutting down refineries. And then the refineries suffered damage. Storage tanks were damaged. Pipelines were inoperative. They couldn't fill delivery trucks. [1][2]
For a typical hurricane, why would there even need to be extra fuel over normal supply? In a hurricane people are driving less. They're staying home. The only extra fuel will be from generators and hoarders.
Price increases would probably decrease hoarders but it wouldn't turn refineries back on and magically make more gas.
[1] https://www.preventionweb.net/english/hyogo/gar/2015/en/bgdo... [pdf][page 6]
[2] https://www.nbcnewyork.com/news/local/sandy-storm-anniversar...
They’re a gas station. They’re sitting on a fuel source. Why do you think it isn’t economical to install a generator? (Or even lease one.)
> why would there even need to be extra fuel over normal supply
Emergency vehicles. Trucks bringing supplies for repairs. People checking in on each other. People coming back from evacuation or leaving to find peace of mind. Also returning to normal life.
And it’s not about extra fuel. It’s about maintaining supplies. New shipments aren’t coming in, which means supplies need to be rationed. New shipments come in slower than they would if prices could rise; nobody serving the general population is incentivised to rush.
> increases would probably decrease hoarders but it wouldn't turn refineries back on and magically make more gas
Emergency shortages are all about distribution, not production. There is plenty of gas in the world in a disaster. It just isn’t making it to disaster victims. (Well, it is. But you have the pay the cab driver cash to pay the guy by Riverside Park for a can at $20/gallon.)
Sounds good, I'd pay tax money toward it.
There were widespread fuel shortages.
> regulations in place to stop people taking advantage of vulnerable people
There were no fuel shortages for folks who could buy on the black market.
> Sounds good
In a sense, the system works. The part of the population that feels good with these rules sits out of the market. The part that thinks it’s silly has access, in part thanks to the shortages/forced curtailment caused by regulation in the legal market, albeit at a steeper mark-up (plus the inherent risks to black market trading).
They have no incentive to do so. If they were actual human beings with functioning consciences maybe, but we often see people use the word "smart" to mean "ruthless asshole without a functioning moral compass". Those people assume everyone else would torture their own grandmother for an extra dollar just like they would, and so everyone who's not abusing the system to its fullest extent is just dumber than them. So in fact the people who are likely to be in power, who have absolutely no incentive to protect their constituents, will likely be in on the con as much as they can, and will actually call themselves "smart" for doing so.
Thankfully not everyone behaves like an economics textbook.
Only the rich people. It does nothing for everyone else.
Shouldn't it be humanity that takes offense in a natural disaster instead of financial exploitation?
Parent's comment was (implicitly) about 50% of this inflation being avoidable and thus surprising, because margins didn't necessarily have to go up to keep business going. It was just a seized opportunity. If you can show that margins unavoidably always go up during inflation because of some fundamental mechanism, then that would be a refutal of the parent argument.
I'm not sure anybody fully understands the mechanism (for the most studied phenomenon of economics, inflation is quite badly understood), but that doesn't change the fact.
Anyway, if you run the Keynes model for macroeconomics, the average margin increases very naturally when the money supply increases. It increases even more if the new money is injected in the economy by well distributed government spending. Still, that's one model we have that kinda works, but it's so full of problems that you can't take its predictions for granted.
> consumer goods companies are not cooperating in efforts to cut the price of thousands of staples despite a fall in the cost of raw materials.
Is this just constant margins being spun as conspiracy?
Say I have a 10% margin on a $100 product. Costs rise 10%, i.e. to $99. If I want to keep a 10% margin, I raise prices to $110. How much of that price rise was inflation versus margin increase? Will someone now claim that 90% of cost rises were due to inflation and 10% margin? (Keep in mind, too, that inflation is forward looking.)
Put another way, how enviable have manufacturers’ margins in Argentina, Turkey or Zimbabwe been?
There’s too little goods being produced for too much people having money. Therefore the people selling goods can raise prices.
For some reason people assume that workers can’t be left worse off with inflation bc they assume wages have to increase to follow it. It doesn’t have to be the case. In Europe, workers are becoming poorer.
See also: 9/11 and various civil liberties.
Unless you're in a highly regulated sector like energy or healthcare, in most countries you don't need an excuse to hike prices.
Again, the "prices are higher cuz corporate greed" logic fails to account the basic fact that companies are always profit maximizing and no relevant legislation related to corporate profits was passed in most countries. If they can increase prices without losing customers, they will.
So, again, what has changed? Search for the balance sheet of your local central bank and you will have an answer.
The grocery store can legally double the price of bread absent any good reason, but people will flip out.
They didn’t flip out when that exact thing happened during the pandemic, because “it’s the supply chain” made enough sense to people they accepted it.
The pandemic gave them a new way to “increase prices without losing customers” for a while.