‘Greedflation’ or just simple economics?

Hubert Kucharski

July 28, 2023

The term “greedflation” has recently permeated economic and political discourse, becoming a highly politicised issue often associated with leftist ideology. The narrative suggests that today’s inflation is primarily driven by greedy corporations exploiting customers through price hikes. Yet, it is difficult to ascertain whether this is a valid economic phenomenon or merely a political construct.

To solve this, I would like to explore two questions, one of which is very difficult to formulate and the other not so difficult. The difficult one is whether or not we are actually seeing greedflation. The answer to this lies in whether or not you believe in micro-founded models or at least our current micro-founded ones. The second – and less problematic – is the brunt of this article – whether greedflation is a solely political issue. Here, I argue that greedflation (whilst certainly politicised) is actually an economic issue and even those on the right could argue for its existence if it is empirically proven. 

Whether or not we are experiencing greedflation is a challenging question to answer, particularly within the framework of mainstream economics. Mainstream economics posits that firms will always set prices at a profit-maximising level based on demand. In this context, the idea of greedflation seems implausible as businesses price goods based on demand, and any price increase is a natural response to increased demand. Yet, in the real world, information may not be perfect, individuals may act irrationally, and, instead of working out their marginal cost or marginal revenues, firms may just choose to price based on their costs. 

Thus, proving the existence of greedflation empirically is a complex task. It requires a clear definition of the phenomenon and a robust methodology to establish causality. One potential approach could be to examine whether firms are increasing their markups during periods of high inflation, which could indicate an attempt to exploit consumers’ acceptance of price rises. In this situation, inflationary noise results in consumers expecting price rises, making price gouging behaviour easier to get away with as demand for goods across the economy becomes more inelastic. I myself would like to study whether such a phenomenon exists in my future studies. 

However, a rise in markup could also be a result of increased demand, which is a natural economic response rather than an act of greed. As such, defining greedflation and ‘proving’ it is a tricky task. Greedflation is complex and for one to prove its existence, one must cast away micro-founded models and replace them with something suitable, such as a data-driven view which uses regressions to determine causality. 

But, the complicated nature of the problem has not stopped finger-pointing. Many companies have already been accused of using the cost of living crisis to drive up prices and boost profit margins. Recent reports on the profits of major energy providers such as British Gas show that these companies have reported significant profit increases amidst the cost of living crisis, which could be interpreted as a manifestation of greedflation.

The second area of exploration is whether greedflation is a purely political issue. While it is often associated with leftist ideology, even those on the right could argue for its existence if it is proven. For instance, Chancellor Jeremy Hunt’s call for companies to make significant empirical profits to help Brits cope with the cost of living crisis, shows that concerns about excessive profits are not confined to the political left.

But what turns the greedflation narrative from a political issue to an economic one is a change in perspective towards certain schools of thought. Specifically, towards a Post-Keynesian direction. Economists who subscribe to this school see inflation as a distributional conflict between different classes. As such, once one changes their economic view to align with macro-founded models based on distribution, the greedflation narrative is no longer politicised and can be empirically proven. We have already seen such thinking entering the mainstream with an IMF report claiming rising corporate profits account for almost half the increase in Europe’s inflation over the past two years 

The concept of greedflation challenges the traditional economic view of price setting and introduces a new perspective on the causes of inflation. While proving its existence empirically is challenging, it is not impossible. It requires a clear definition, robust methodology, and careful interpretation of data. Regardless of its political connotations, greedflation is fundamentally an economic issue that deserves further investigation. As we continue to grapple with the cost of living crisis and its impacts on society, understanding the role of corporate profits in driving inflation could provide valuable insights for policymakers and economists alike.

Author

  • Hubert Kucharski

    Hubert is reading Economics at the University of Leeds and is the Head of Research at the Leeds Think Tank Society where he employs the skills he learned during his IEA Editorial Internship. In his spare time, Hubert also runs an economics education company, The Backseat Economist, and enjoys writing for many different publications.

Written by Hubert Kucharski

Hubert is reading Economics at the University of Leeds and is the Head of Research at the Leeds Think Tank Society where he employs the skills he learned during his IEA Editorial Internship. In his spare time, Hubert also runs an economics education company, The Backseat Economist, and enjoys writing for many different publications.

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