62
votes
Greedflation accounts for fifty-three cents of every US dollar of inflation in past six months
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- Authors
- Chris Walker, Jake Johnson, Julia Gledhill, Rebekah Barber, Sharon Zhang, Yuki Noguchi, Justin A. Davis, C.J. Polychroniou, Tyler Walicek, Zane McNeill
- Published
- Jan 22 2024
- Word count
- 528 words
I really feel like these articles have an extraordinarily facile model of economies, like not far beyond outside lemonade stand level, not to mention questionable sourcing. On the latter, why does it source a guardian article sourcing a thinktank publication? Is it too much for the author to read the primary source themselves and base their reporting off of that instead of doing journalistic telephone? Why is there no critical analysis of said source? I think if there was a Cato, or other conservative, thinktank wrote about how overly high taxes is causing inflation there'd be some scrutiny wanted, at least.
And this is just a lie, the report doesn't say anything about increased CEO pay.
Like that's just not how it works. I feel like this is based off a model where business have their break even price, then add on some margin they feel like is appropriate but not too mean, but from a high level point of view, in a market economy firms price to the point of maximum profit. Not "acceptable profit", "maximum profit". That is how it was when inflation was at 1.4%, and it is the case when inflation is at 10%.
There's two kinds of inflation, demand pull and supply push. For some reason supply push is considered the inflation, even though demand pull is more common. If there is demand pull inflation, then it will be reflected as increased margins - it means there isn't enough goods and services, and it's a price signal for more producers to start.
Additionally, there's the idea of price stickiness. Prices can be sticky in either direction, and when supply-push inflation retreats, sticky down prices can keep prices up.
Talking about with the childish model doesn't give you tools to actually talk about how to address it. If you talk about demand pull inflation, about price stickiness, there's things you can do about that, there's economic research that can both give us potential solutions and help us predict what will happen in the future.
What exactly does the article want? People to be less greedy or something? Hire some ghosts to give'em the christmas carol treatment? I feel like it's just supposed to make you angry and helpless.
If you want to dive deeper, here's one of the older sources, the Bank of England. The thinktank you refer to also isn't a bunch of nobodies, it's the largest trade union in the UK.
As you go through the various studies they've done, there is a clear picture that firms, especially ones selling consumer goods, are increasing prices higher than any other sector, outpacing baseline inflation by a good margin.
I assumed that these articles exist to create a counter to the "prices are higher because a democrat is president" stories that are featured on conservative sites.
So yes this "greedflation" narrative is a little dumb, but not dumb compared to daily Fox news stories about democrats are letting caravans of migrants invade.
The problem with saying that anyone can understand something without knowing much about the subject is that they usually end up relying on headlines for information. That means they are basically allowing others to control the narrative for them. Those headlines usually say something about record revenues, but that doesn't mean record profits. I know that people have been saying the same thing about grocery stores in the US, but I also know that the largest grocery companies have had profit margins in the 1-3% range, which is not great. I looked up Tesco's annual report, and it seems to have had 1.1% profit last year and 2.5% profit the year before that. This is a really low profit in the grand scheme of things.
So the question becomes: why does Joe Normal "know" that grocery stores are gouging him, when they clearly are not profiting much?
Back in the John Stewart Daily Show, he had a guest on one time trying-and failing-to explain why energy companies profits necessarily increase when gas pump prices rise in response to crude price increases.
I still don’t understand. Seems like a sane system would increase prices only just enough to match crude supply price increases; thereby keeping profit constant while revenue grows. But that is not what happens.
Prices are not set by adding some "fair" amount to the cost. It might resemble that sometimes, but that's just not the driving force behind how prices are set. This is true not just now, but throughout history. Prices are what people are wiling to pay, not cost plus a bit, and that's a good thing, because it's a better reflection of reality.
Say crude prices go up. That's not something that just happens arbitrarily. So let's say that's because supply is down. All the gas stations still want the same amount of gas, but now there's less gas to be had. The price goes up in response, which is classic demand curve behavior. This isn't a bug, it's a feature. Gas stations would be disincentivized from buying more than they need when prices are high. If prices get higher long-term, then certain sources of oil become worthwhile to extract, and supply will increase to catch up with demand. If prices were not allowed to rise above "cost plus a little bit," people would stock up and cause shortages (see toilet paper during covid lockdowns), and you'd never get that extra supply online because it's not worth it to spin up the additional production.
Now, there are many caveats and exceptions to this, but the general mechanism still holds true. We've seen a lot of individual products follow these econ 101 principles exactly. For example, when there was the egg shortage a year ago, you could still buy them at grocery stores, just at high prices. In this situation I could choose whether I really needed eggs, or if I should turn to alternative foods. Costco refused to increase prices much, but they became completely unreliable as a source for eggs because I never saw them in stock. In this situation I basically don't get eggs as an option, unless I'm willing to show up in the morning on the specific day they restock.
Usually the response to all this is "what about poor people?" I think we as a society should help the disadvantaged, but that's a government problem, not a market problem. All the strongest economies in the world seem to use some combination of markets and government for handling distribution of resources.
Do you have any data to back that up? From what I'm seeing, real disposable income has definitely flattened off, but hasn't gone down more than perhaps a few %age points temporarily, even when looking at the bottom 5%.
I can't speak for the author of the article, but for myself, I would like to see corporations expand their definitions of "profit" beyond dividends, stock price and stock buybacks. Those are terribly shortsighted metrics by which to judge profit, and really only benefit high-level executives and large shareholders (among whom I acknowledge retirement funds). It's my belief–supported only by anecdote and deductive reasoning, I admit–that this conceptualization of "profit" doesn't even benefit those groups long-term, as their near-term profits come at the cost of long-term societal health and stability.
I further believe that this is a problem that can be addressed by regulation and changes to tax codes. For example, taxation schemes that take wage disparity between c-suite and low-level employees into account would begin to address uneven wealth distribution. Likewise, regulatory fines commensurate with the monetary profit gained by antisocial business strategies would disincentivize such behaviors and encourage accounting for negative social effects on a wider scale.
As it stands, regulation and strict tax codes are seen as hindrances to economic growth, and are fought tooth and nail by people incapable of seeing beyond a short-term "number goes up" paradigm of growth. You don't need to look hard to find examples of how this approach can go wrong.
I should add that a good first step toward making such reforms is acknowledging the faults of our current paradigms, and part of that is pointing out instances when profit-seeking as we currently know it can be harmful. That's where studies and articles like this one come in.
Even apart from lofty things like social good, I’d hope companies could at least recognize that the constant shrinkflation / greedflation / enshittification race to the bottom is only hurting their own viability long-term.
I’m not an expert in business or finance, I’m just going off anecdote too. My impression is that over the past two decades or so, basically every huge brand has been steadily, deliberately cheapening their own products and services while demanding higher prices for the inferior stuff. That’s not sustainable. It’s self-sabotage. They are actively destroying their own businesses for the sake of short-term gains.
Greedflation just doesn't make much sense as a narrative. Why has inflation gone back under 2% in the US? Are corporations just less greedy all of a sudden? Businesses are always maximally greedy; they always try to make as much money as they reasonably can.
Supply chain shocks have more explanatory power than corporations suddenly became greedier. Consolidation and price setting power might be sensible explanations too except that doesn't explain every sector.
I don't know much about economics, but couldn't inflation being under 2% (if this is actually true) just mean that companies finally reached a point where consumers weren't willing, or more likely able, to pay more and finally turned down the knob? It's not like all those previous price increases are suddenly gone now. We still underwent massive inflation over the past 4 years; and even if inflation was 0 those increased costs would still be too much for some consumers to bear.
You're getting at the idea of demand-pull and cost-pull inflation. If companies' greed is static (always maximally greedy), what causes prices to increase or price increases to moderate?
There's heavy debate amongst economists over the true/ideal inflation rate, anywhere from 0-3% is pretty acceptable I think. Consumer incomes have increased too, and real incomes are on their way back up.
A piece that fits is that inflation has gone down for their macro costs, but that they are charging (unnecessarily) more with the consumer prices.
Prices rarely drop. Widespread price drops turn into deflation and that's universally bad for an economy.
I do not care how thoroughly deflation would wreck the automotive or real estate industries. Both could use a substantial humbling for the benefit of those of us who wish to get on the ladder.
And how do you explain the PC and smartphone market? They experienced multiple decades of deflation.
I posit slow deflation isn't actually a bad thing, and is in fact preferable to perpetual inflation..with two major caveats. A reasonable minimum wage, and the dissolution of debt.
Deflation of big ticket items is a good thing, because then more people will only buy them when they feel there is a good reason to. It encourages savings and stability.
Deflation of essentials is a good thing, it means being able to buy more goods with your same wage.
The only place for consumers where deflation is an exceptionally bad thing is debt. If wages do fall, it makes it exponentially harder to pay down. Again, mitigated by proper minimum wages. And if it discourages spending (the 'holding out for better prices"), all the better to help build savings.
A deflationary economy would utterly cripple the financial sector, because all debt would be toxic. And debt is foundation upon which all other financialization is built.
Electronics have become less of a “big ticket” item. They are priced less, but they are bought more frequently; there’s lots more of them.
And thats partially because of immense deflationary pressure. A function of both costs (and prices) dropping generation after generation, but also at the speed things were improving.
A hypothetical ideal consumer would have never bought a computer before 2006ish. They would have gotten a much better computer by waiting 6 months, indefinitely, for about 20 years. And that's what most electronics should be... long-lasting durable goods that last 20 years, minimum. The fact that they cheap disposable consumer goods is a major ecological problem. Not even thinking about extraction and manufacturing, but of waste management.
Cellphones, computers, tvs, stereos. All of these things have hit a level of technological maturity there is no reasonable reason for them not to last that long anymore. The main reason they don't is lazy companies not being forced to support their stuff long term. The secondary is application bloat, but that's been true since 2002 as well.
The article isn't about the economic cycle, but about something "artificial" - price gouging.
This doesnt seem to hard to reconsile if you consider that businesses don't have complete information. Especially when dealing with markets lacking a lot of competition due to consolidation.
While businesses are always maximally greedy. It might take an example of another company successfully raising prices in order for them to realize they could raise prices and get away with it in their current context. Leading more companies to reevaluate and a wave of price increases. None of which could be fair or reasonable and could end up in a scenerio where you're just squeezing consumers harder because they lack alternatives. Which I think is what people are considering as greedflation.
As for how to get evidence of that I'm not sure. But record revenue would be consistent even if it's not only increased profit. I suppose finding industries with a ton of competition might be one way as you'd respect them to be more informed and not make these drastic price jumps.
You might be interested to know that this kind of coordinated information sharing (PDF warning) is leading prices to rise as high as the market can bear, exclusive of input costs. RealPage, YieldStar, and other algorithmic coordination services for rents have resulted in 40% or higher price increases in a single year in some markets.
And in the US there is also an antitrust lawsuit because of it.
I saw this interesting post by Robert Reich.
https://masto.ai/@rbreich/111840087784759195
He quotes an example of one corporation's cost going down dramatically, but they still raised their price.
What does that even mean - the definition of inflation is the rate of change of prices. That's like if you're in a car that's moving forward and someone says "our car is moving forward; Velocity? Wrong."
Sure, that's because prices aren't set as per unit costs + set margin. Supply is only one side of the equation. I'm not surprised that diaper prices would increase; they're a product with fairly inelastic demand from the consumers who buy them, and we've seen high nominal wage growth, and positive real wage growth, in the last two quarters. So to see a nominal increase in demand for diapers absolutely makes sense.
And I actually took an undergrad course with Reich. I think Twitter and the equivalents has a really strange control over academics and their desire to pump out content for them.
I think it’s important to keep in mind that when a company does lower prices in response to lower supply costs, it’s not to be nice, or because it’s the correct thing to do - it’s because they’ll make more money. Pricing is an optimization battle between two factors: the higher your unit price, the less people will buy it, but the more your margin increases. So you want to balance those two factors to reach maximal profit. Increasing prices does not intrinsically make you more money.
Increasing or decreasing prices for a particular firm are just two sides of an optimization game.
I don't think that's clear at all, it's implying a colloquial definition when there isn't one. Additionally, there's no reason to think that supply based inflation is any more "appropriate" than demand based inflation. They're both important price signals, without the latter supply would not be incentivized to increase to match demand.
No, it's due to economic pressure. Again, it's the law of supply and demand, not the law of supply.
All companies are maximally greedy by definition. There has been no change in level of greed. If you were to somehow measure the amount of greed in Tyson food in 2015 and in 2023 it would be exactly the same: 100% greed.
If the price changed, then either the market dynamics changed, or there was some kind of market failure. The latter is perfectly possible possibility, although it requires evidence to substantiate it, but the market failure isnt' "greed" - that is the only reason the market works.
That's not the social contract at all. The underlying theory behind market economies is that forcing adversarial entities to compete causes an optimal allocation of resources. Absolutely companies are expected to maximize profit - it's not incidental at all, it is exactly what you'd want them to do.
That's really a separate issue. Monopoly is a type of market failure, and if there is one, that is something that should and can be addressed. But it's not because of "increased greed".
I really don't think so. IMO the average person interprets inflation close to "prices going up", or "value of money going down". In fact, part of the discourse is trying to "redefine" inflation, or that is, to say that this isn't inflation, inflation is actually Y, and what is happening is something "beyond" inflation.
No, if the system requires the participants to be benevolent, it's not stable. A market economy expects its participants to be maximally greedy, and that's part of why it's been so successful, since you don't need to expect anything out of a particular firm.
I don't think "greedflation" is real. We had inflation from a combination of supply shock from COVID measures and a demand push from various relief programs by governments. The US spent over $5 trillion in COVID stimulus, and despite some fumbling on specifics, it went pretty well - the demand hit from COVID was very minor. Inflation in the US has mostly be reigned in, and there's been two quarters of real wage growth.
Demand based inflation would cause an increase in margins from producers. That's not unexpected or some surprise at all.
We went through an economic catastrophe remarkable unscathed; people may have felt like they've stood still in the last few years, and they probably would have, but the counterfactual is a 2008 level recession.
I'm saying it's a separate issue from "greed". If the only thing that is keeping a monopoly from forming is a lack of "greed" by participants, then the economy must be the size of a local village, because on a national scale that just doesn't happen. If there wasn't a monopoly, or collusion, before, it wasn't because the participants weren't greedy.
Similarly, "naming and shaming" greed doesn't accomplish anything. You're trying to name and shame what in many cases amounts to a bunch of spreadsheets glued together by human interfaces. If there's a monopoly, you should break it up; if there's collusion, you should investigate and break it up. That's what fixes market failures.