'Greedflation' study finds many companies were lying to you about inflation
fortune.com
fortune.com
I think there is this expectation that companies "should" only raise prices necessary to cover their cost increases. But companies charge what the market can bear and, depending on the specific circumstances, this could be equal to, less than, or more than the cost increases.
To use a HN-friendly example, let's say AWS cuts their EC2 costs. If you're providing an undifferentiated computation service using EC2, you'll likely have to cut your costs or you will lose all your business to your competitors. If you're providing a highly differentiated SaaS product, you can probably keep the cost savings to yourself.
You can reason in the opposite direction for price hikes. Depending on the exact company in question, they could be in a privileged position of the supply chain or have marketing power that allows them to increase prices even more.
One main difference here is price stickiness [1], i.e. prices tend to be fixed for a period of time, even if the underlying economics has changed. I think this is underlying reason for perceptions of "greedflation" because, during period of inflation, prices become less sticky and companies use this to adjust prices to better match the underlying economics.
The economy isn't just some abstract numbers game, there are real people living in it. The expectation that companies shouldn't juice more money out of customers who will suffer (or at the very least have to lower their living standards, which isn't as bad but is still not awesome) because of it is a very justified one.
This is not about inflationary pricing. This is companies using broader inflation "memes" as a cover story to stuff their pockets.
No worker jobs were at risk.
This is solid evidence that we do not have a free and competitive marketplace for most goods and services. That is the problem and its gets worse every day.
1. it certainly can be true.
2. but also if other countries print money, it can still cause inflation in your country.
3. and you can't stop them from doing that.
So "don't do it" won't save you. You also need diplomacy and an army.
Also, a better explanation of the theory isn't "money printing" but "higher money velocity" aka MV=PY, which is why it's managed with interest rate hikes.
Of course I don't mean to imply they operate in a vacuum. They can obviously see competitors raising their prices. I just mean to say they don't get into a room and actively decide on a price.
I also don't think the monopoly model applies outside industries like energy where there's obvious physical reasons to have one, but there are reasons it helps to grant one to a business in exchange for heavier oversight. It's hard to regulate a lot of small companies.
In general though, "big monopoly corporations" causing everything is a leftover of 70s New Leftism, which was a failure and worse than their prior Marxist analysis.
Normally when a business raises costs, regular customers react by blaming the business and taking their business elsewhere.
But when all your customers are reading headlines about inflation, you kind of get a free pass to raise prices on your customers, and direct their ire toward the ambiguous specter of "inflation", regardless of whether or not you actually need to raise prices. When your competitor across the street sees you do this, and sees your customers still patronizing your business, and your profits skyrocketing, they do the same.
Some portion of inflation was real, but a nontrivial part was simple herd mentality by the businesses and using pricing psychology to exploit their customers' irrational decision making.
> In the long run we're all dead.
A huge % of the goods & services in this world are in the hands of a couple dozen massive conglomerates, after endless consolidation.
This particular narrative seems so believable to me, that a couple companies lead the way jacking up prices in a time of crisis while bandying about shitty airless crap about inflation & costs while profits soared. The very big giants doing this set a precedent & narrative, created a vibe that could perpetuate & extend greedflation. The exact same hype & fury lead us to believe retail theft was astronomically worse: again, now that the chips are falling, we see: this was a boldfaced lie.
You've got these big companies that dominate and make it tough for competitors to get a foot in the door.
The pandemic threw supply chains into a tailspin, leaving folks with fewer choices and companies with the goods charging top dollar. Post Covid/Ukraine, these same companies found themselves suddenly holding all the cards, letting them hike prices.
Everyone kinda expected to shell out more, because of the looming inflation, so companies were able to slide in bigger price tags under the radar. And this was all for stuff people can't live without, like energy, so they payed up even if it hurts. And it's not really clear to average folks what these companies real cost are, so it's easy to believe the price increase are all legitimate and due to some "real increase in cost".
And that is against a background of 10 years of ZIRP and the government threw money at corporations through PPP and blunted the effect of the pandemic recession and we were clearly against the inflection point of the short-term phillips curve.
Market forces should entirely predict all of this.
(And companies are ALWAYS ALWAYS ALWAYS "greedy", the headline line should probably be something like "Millennials wake up one morning and discover how capitalism has worked all along [SHOCKED]").
If only there were some way for common people to share in the profits. Take a small ownership in the corporations. That would address so many issues!
If people are willing to pay these prices, why should companies not be raising their prices?
There has been an enormous increase in net worth of all age brackets in the US in the last few years (as of 2022 data[1]), all data points adjusted for inflation. I think this is enough to explain why consumers are paying for these items.
Feel free to experiment with this graph tool from the US Federal Reserve's website and please respond if you have any other explanations:
1. https://www.federalreserve.gov/econres/scf/dataviz/scf/chart...
Food is an interesting one. In my experience the value of fast food is at an all time low. Before it would be half the price of a sit down place. Nowadays it's more like 80% of the price. I'm not sure what exactly happened there. I went to subway and my bill was $15. I went to a sitdown place and my bill was $19.
According to those graphs, even the bottom quartile saw a substantial increase in net worth during the pandemic [1]. Sure, this is much less in absolute terms than the higher quartiles, but as a percentage increase it's actually far higher (almost 1000% between 2019 and 2022).
This doesn't detract from your point that poorer people don't benefit much from capital gains, but I think it's still worth pointing out.
[1] https://www.federalreserve.gov/econres/scf/dataviz/scf/chart...
Which one is the most aligned with your interests is a difficult question, or at least not one I know the answer to, but it's probably not whichever one is the smallest business.
I would say capitalism is a system which innately maximizes for greed. When the money supply expands, greedflation is outright expected - no collusion or conspiracy required.
Blackrock does vote its shares for you most of the time, which can be a big impact, but my understanding is the practical impact of this has mainly been that BlackRock tells companies to care about climate change more and then Republican attorneys general get mad at them for this and write threatening letters about it.
The cycle where CalPERS puts all their money into tech startups and makes Silicon Valley VCs rich is more interesting I think.
It's the same sort of misdirection we have in California with gas prices, etc...
Expect a lot more of this type of activist "journalism" in the near future.
Personally I don't consider this "greedflation," but post-pandemic economics exposed that the equilibrium between producers and consumers was vulnerable to a major shift (in favor of the producers), and they took advantage of that.
Nobody is saying inflation doesn't exist.
By your logic any price hike is to be accepted and not questioned because "basic economics"...
You have a lot of faith in a lot of people who's sole purpose in life is to make more money than they did last year.
Bizarre non sequitur.
> By your logic any price hike is to be accepted and not questioned because "basic economics"...
No it doesn't. But by your logic, surge pricing is theft.
I have no particular faith in people. I observe that there's all kinds of irrational, nonsense beliefs scorned by mainstream economists that are popular among certain groups. "Greedflation" is dumb economic populism, nothing else.
X causes Y doesn't mean Z cannot cause Y too.
You might want to reconsider that your 'basic knowledge of economics" isn't enough to explain everything.
https://australiainstitute.org.au/post/oecd-confirms-that-in...
https://www.npr.org/2023/05/19/1177180972/economists-are-rec...
https://www.investmentmonitor.ai/news/corporate-profits-resp...
https://www.ineteconomics.org/perspectives/blog/profit-infla...
Like I said, in any social mileu there are insane things that are commonly believed. Providing evidence that people believe in "greedflation" doesn't contradict that at all.
Try actually reading the article before commenting. The article does not say that inflation is caused by greed. Not even close.
Here is the study: https://www.ippr.org/files/2023-12/1701878131_inflation-prof...
Of course corporations will try to raise prices when they think they can get away with it. The question is, why did they think they could get away with it? Or, put the other way, why didn't they think they could get away with it before?
I assert that what prevented them before was competition - if you raise your price, and the other vendor doesn't, you lose business. Well, what happened? Did that mechanism just take a holiday? Did competitors disappear? Or what? Why did companies think they could get away with it now, when they didn't think that before?
That's where all these "greed" explanations fall short. Of course companies are greedy. They were greedy five years ago, too. Why weren't they raising prices then?
It also could be a self-fulfilling prophesy. Companies' costs did in fact rise, because all their suppliers raised their prices...
This has some explanatory power: they can get away with charging more dollars because more dollars are available.
The money supply expanded like never before in 2020: https://fred.stlouisfed.org/series/M2SL
It is now contracting, which is also unprecedented. We may well end up with deflation and while that sounds nice, we don’t know what might break.
Some other countries are doing poorly at the moment, but that's always true.
If you want to see the money supply shrink more, I'm told a good way is better tax enforcement.
https://x.com/bbkogan/status/1733190102245888366 (sorry for the informal source…)
"the report finds that company profits increased at a much faster rate than costs did, in a process often dubbed “greedflation.”
You're the CEO -- for the past 5 years, costs rose steadily 2-4% annually, and you raised prices 3% each year. Now Covid hits, everything is in chaos, you expect costs to rise somewhere between 5 and 15%. Of course, there is also the possibility that you won't be able to access one specific ingredient at all, or that one element will spike in price. Now -- as CEO, how much do you raise prices? Just the average between 5 and 15, or do you err on the side of safety and raise prices 15%, or even more?
b) risk premiums exist in every form of economics. it's why, typically, stocks return more than bonds over time, for example. Why would regulators be interested in auditing companies for acting rationally?
I am not dismissing the concept of a risk premium. I am saying they can exploit the concept of a risk premium to justify an excessive increase in prices, beyond what is reasonable. Companies can collude to set higher prices and blame inflation.
Antitrust laws and regulations exist for a reason. Companies have been cheating since the beginning of the history of companies.
You wrote:
disguised as a "risk premium"
Saying something is just a disguise for something else and, for additional emphasis, putting air quotes around it is an unmistakable dismissal of the concept. Hard to imagine how you could have been more clear.
Neither is a dismissal of the concept itself. It's about the intentions of the companies.
A reminder: Inflation is a hardship, a short one in this instance, unemployment is a crisis.
Excess inflation represents permanent hardship. Inflation is a growth rate -- if it is 2% every year, then spikes suddenly to 8% for a year, and goes right back to 2%, that excess 6% is permanently embedded in prices in all future years. (very simplified example, but the concept is valid)
Put another way, we don't suddenly have 6% fewer goods and services for the rest of eternity just because the value of the dollar changed.
> [...] wages do not increase as a result of high inflation
Not in the short term, sure. But if the cause of the inflation isn't something permanent, labour is still (somewhat) subject to the same market equilibrium (in real terms) as it was before the inflation. There are some major caveats here (e.g. wage stickiness), but we're talking long-term.
> which is exactly what we are witnessing now
I don't disagree, but again this isn't long-term. I assume you wouldn't expect these effects to last for the rest of eternity (assuming inflation returned to 2% and stayed there)?
> society's lifestyles have slowly shifted in response to the fact that, over the long-term, producers have become increasingly effective at extracting a larger and larger share of consumers' incomes, and ultimately, realized and potential wealth.
It sounds like we basically agree (even if I'd describe it a bit differently)?
Edit: I guess what I'm trying to get at is that there are lots of different things that can cause inflation, and not all of them follow your example of "that excess 6% is permanently embedded in prices in all future years" in real terms.
by "producers", I am not referring to wage-earning employees, but (primarily) corporations and business owners.
> there are lots of different things that can cause inflation
yes, true. but you've offered no support for your original claim that "wages catch up," or that the negative effects of brief periods of excess inflation are not long-lasting.
Also, retirees with savings don't tend to have all of it in cash (I hope?), but even if they do, the higher cash rate will slightly offset some of those effects.
Why do you all insist on making shit up?
There were a lot of other supply interruptions; one is Ukraine produces a lot of wheat, but also neon gas, which is needed for computer chip fabs.
Public companies. Publicly available information.
> And are also if ignoring the fact that every product or service requires energy, and energy prices are on the rise
The study tackles this head on. It mentions that the rise in energy prices due to the invasion of Ukraine is one of the initial triggers of high inflation, but that market power held by some corporations in certain sectors, including energy, amplified the inflationary effects of these initial triggers. Resulting in price increases peaking higher and remaining more persistent than they would have been in a market with less corporate market power.
Basically, it says there shouldn't have been this much inflation, but it got amplified because of lack of competition, and of being able to justify price hikes due to customers expecting there to be inflation.
They talk about the energy sector specifically, and how their costs did not increase, but they found themselves in a position of market dominance, where they could raise prices above their increase in cost and get away with it.
You can't shutdown all production plus pump money into it at the same time, and not expect inflation.
That's what happened with eggs in the last year; the price went up because nearly all the suppliers' chickens caught bird flu and had to be culled. So the surviving ones made a lot of profit as a reward for still operating. But prices are back to normal now.
Easier than explaining this:
> Inflation is now beginning to regulate in most major economies and coming closer to most central banks’ targeted 2%. Some companies that previously passed rising costs on to customers to continue making a profit have now sought to repay them with price cuts.
Good thing those companies that were greedy in 2021 are apparently negative greedy in 2023. I guess greedflation is transitory.
Corporations inflated prices when they could get away with it, and deflated them when they no longer could.
I think my explanation is actually easier than the supplier thing.
What normally prevents this is competition, not regulation. Normally, if someone raises prices of something like eggs "too far", then people buy their competitor's eggs.
So "could get away with it" means that competition no longer prevented them from raising prices. So that brings you right back to the supplier thing, or something very much like it.
I have enough money that when the price of eggs goes up, I grumble and buy them anyways. I dont skip the eggs and go buy dried beans.
Or, consumers have more money. That could come from dumping a bunch of money into the economy. (In fact, that was a goal of dumping money into the economy.)
Isn't that what we are seeing, that prices are starting to come down?
Prices going down in a single sector is okay, especially a volatile market that's kind of used to it, but when it happens everywhere that's "deflation" and means you're in the middle of a serious economic crisis like 2008.
Traditionally, inflation is attributed to: increased production costs (like raw materials, labor, etc.), increased demand, and monetary factors.
Greedflation instead says some of it is also attributed to: firms with significant market power increasing prices more than would be necessary to cover their increased costs.
This kind of price increase is not driven by the usual market dynamics of supply and demand but rather by the strategic pricing decisions of dominant firms in less competitive markets. That means, as competition ramps up, or buyers start holding back expenses, prices will come down again, to what should have been the "real inflation" all along.
If there's expected inflation or deflation it's not too bad; purchases get pulled forward or delayed but people can still make plans for it.
Unexpected inflation makes people unhappy because they have to increase spending on essentials, but they usually survive, and it's good for debtors because they get nominal wage increases which make nominal debts easier to pay off.
But the opposite happens with unexpected deflation - it gets harder to pay off loans, which is bad if your business has loans and can kill it. So if a company got a profit hike, reinvested all of it, then had a deflation shock, they might go bankrupt.
This is okay if it only happens to a few companies, but greedflation relies on some companies being extra important to customers, so that seems extra disruptive if they fail.
So if a company got a profit hike, reinvested all of it, then had a deflation shock, they might go bankrupt
I do remember my local store sold out of regular eggs (since the alternative to a price hike is a shortage) and I had to buy a pack of extra fancy ones that were all different colors and tasted unusually rich because they were fed on caviar or something. I tried to make that purchase last longer on principle.
Supply shocks (e.g., bird flu) result in price rises in the presence of relatively inelastic demand (e.g., consumer staples).
In economic terms, "get away with it" means "what the market will bear". Find me a company that doesn't try to charge as much as it thinks it can to optimize for total profit when you account for decreased sales due to higher prices than other sellers in the market.
Any explanation needs to show why it didn't happen from 1990-2021, did happen 2021-2022, and then partly undid itself. Certainly some room for psychological factors in 2020, but it's probably not the main reason.
It's not even necessarily "they got greedier", even CEOs expected troubled times ahead, and rising costs, so they also increased their prices, but they did so preemptively, instead of as a reaction to actual rising costs. What happened then is that they raised prices higher than the costs ended up being, and they did not immediately correct this, until they started seeing buyers change their behavior where they now feel the pressure to lower prices again (in order to sell more).