The ‘greedflation’ question: what have we learnt?

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As prices surged, some pointed the finger at profiteers. Cue a heated debate, which along with inflation has mercifully now cooled. With the benefit of time and data, what have we learnt about “greedflation”?

Naysayers maintain that it is enough to point to the pandemic, the war in Ukraine and government support if we want to explain price increases. We don’t need a story about villainous monopolists amassing power, then suddenly gouging unsuspecting customers. But it’s a bit more constructive to try to understand what the more careful greedflationists were arguing — which is not that the mismatch between demand and supply was irrelevant to inflation, but that corporate power helped to embed it.

For example, Isabella Weber and Evan Wasner of the University of Massachusetts Amherst suggest that supply chain bottlenecks crimp competition by leaving some firms unable to service demand. Those who can get inputs then hoik up prices. And when people understand inflation is generally high, they spend less effort on bargain hunting. That means firms find it easier to try it on.

The quest for evidence supporting this theory has had mixed success. Explorations of the national accounts show something happening. Jonathan Haskel of the Bank of England calculated in May that rising “unit capital costs” contributed about two-thirds of economy-wide inflation (not just consumer prices) over 2022 in the UK and the eurozone, and about a quarter in the US. But he warned that such capital costs include more than pure profits.

A note from September by Bernardino Palazzo of the Federal Reserve board found that American profits as measured in the national accounts were boosted by plunging interest rate costs during the pandemic, as well as government support for businesses. That muddies any other analysis of whether market power mattered.

Profits in the national accounts are distinct from those described for investors in corporate accounts. A new note from the Bank of England studies those in the UK and eurozone and finds that yes, profits rose a lot in nominal terms. But so did costs. And so they conclude that other than in oil, gas and mining, profits up to 2022 behaved pretty normally.

Accounting profits can be pushed around by all sorts of things. The measure of companies squeezing consumers that economists usually prefer is different, and defined as the mark-up charged over marginal cost. If inflation was driven by companies exercising market power, one might expect to see a correlation between price increases and rising mark-ups.

Awkwardly, mark-ups have been moving all over the place. A study from the Bank of Italy estimated that in Germany they were constant in industry and manufacturing in 2022, but rose in construction, retail, accommodation and transport. In Italy, they returned to pre-pandemic levels pretty quickly. Another from the IMF studying the eurozone concluded that “limited available data does not point to a widespread increase in mark-ups”.

A paper by Christopher Conlon of New York University and Nathan Miller, Tsolmon Otgon and Yi Yao of Georgetown University found no correlation between mark-ups and price increases between 2018 and the third quarter of 2022 in the US. A different study from the Kansas City Fed found that mark-ups in the US surged in 2021 but then dipped during the first two quarters of 2022 despite high inflation. That looks like companies raising prices in anticipation of their future costs going up, not price gouging.

The riposte to this assortment of correlations and trends is that they are not really a test of whether market power matters. If companies can defend their profit margins in the face of rising costs, that could still be a sign they are exercising power. Absence of evidence is not the same as evidence of absence.

There are some interesting efforts to go further. A working paper published in October compares industries and countries within the eurozone, and finds that those with more pre-pandemic pricing power and facing high demand did find it particularly easy to raise prices amid the supply chain disruption. These powerful companies also found it easier to raise prices once inflation expectations were elevated, even if they didn’t face any supply bottlenecks at all.

This sort of result speaks to the better (boring) version of the greedflation story, which is that in trying to maximise profits some companies helped a cost shock to propagate through the system. Something to watch, not dismiss out of hand.

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