9 ms·

Once a fringe theory, “greedflation” gets its due

71 points by danaris 3y ago

snapplebobapple 3y ago
The failure at trust bustng causing decreased competition and more market power is one part of why this is questionable. The other shoe that hasn't really dropped in this conversation is that companies hate increasing prices so the game is often to raise prices more a few times rather than many times but for smaller amounts. We will need to look back on this whole price and profit move over the whole government caused supply and demand shock to see if profits are below normal later and somewhat cancel out higher profits now to know if this is happening. To say greed is causing inflation rather than greed is a response to a government caused supply and demand shock is really questionable to me though. It takes away from the major role of bad government policy in the root causes of this situation and puts it on companies responding as profit maximizers (as they always should be) to government created aituations.
Centigonal 3y ago
Definitely! Same with layoffs, and same with "kitchen sink" quarters. Any corporate action that results in negative PR is more likely in an environment where others are doing the same thing, since the negative PR cost is lower when it's a normal industry trend. So we should expect this kind of stairstep behavior.
ls612 3y ago
Greedflation is bullshit because it’s not like companies weren’t greedy in 2019. Inflation has changed between four years ago and today, whatever explanation you want for that needs to have something changing to cause the inflation. Profit maximization attempts are not one of the things that have changed.
- JohnFen 3y ago
  Not saying this is the explanation, but here's a possibility. True, greed is a constant, but what companies can get away with isn't. It may be the case that companies can get away with putting the screws to everyone harder now than they could prior to 2020.
- adrienthebo 3y ago
  Profit maximization attempts have changed; supply chain disruptions provided an opportunity for corporations to increase their prices in unison. Prior to the pandemic there was more risk in unilateral price increases but now companies can look at pricing velocity and effectively work as a cartel without engaging in explicit conspiracy.
  - megaman821 3y ago
    Either people have more money to absorb these cost increases or demand for some other non-essential goods is tanking. If it wasn't the government printing a bunch of money and it ending up in people hands to buy essential things, what are the non-essential things that no one is buying anymore?
- camgunz 3y ago
  Greedflation is the phenomenon whereby corporations increase their prices to chase higher profits, hoping that they can blame it on "inflation". This then intensifies inflation. I think everyone--including people like Jerome Powell--agrees this is happening.
  - toomuchtodo 3y ago
    > "If corporate profits were to decline from the extremely high levels that we saw recently, would it be possible to sustain" growth in workers' benefits "even as we get inflation down to the target of 2%?" Democratic Senator Chris Van Hollen asked Powell during the Fed chief's semi-annual testimony before the U.S. Senate Banking Committee. > While that might be difficult in the long run, "over the shorter term though, yes," Powell said, dipping tentatively into a debate that may become more pointed over time depending on how inflation, the job market and the economy evolve. https://www.reuters.com/markets/us/feds-powell-acknowledges-slimmer-corporate-profits-could-help-curb-inflation-2023-03-07/ https://www.reuters.com/markets/us/feds-powell-acknowledges-...
    - octobus2021 3y ago
      In the same article: "Wages affect prices and prices affect wages," Powell said, associating current earnings growth to the current ultra-low unemployment rate of 3.4%, and suggesting the labor market may need to weaken at least somewhat for inflation to fall. meaning that in his opinion inflation is driven by high employment, aka people spending money like crazy because they have more money that they know what to do with, and the solution is to make sure more people are out of work and with less funds to spend. Perfectly logical solution to producer-driven inflation I guess.
      - toomuchtodo 3y ago
        https://www.cnbc.com/2023/04/21/why-economists-are-no-longer-so-worried-about-a-wage-price-spiral.html https://www.cnbc.com/2023/04/21/why-economists-are-no-longer... > The experts were worried about a so-called wage-price spiral. This occurs when workers expect inflation to keep rising, so demand — and achieve — higher salaries to keep up with price rises. Businesses then raise the prices of goods and services to cover higher labor costs, at the same time as workers have more disposable income to increase demand. This creates an inflationary loop, or in the language of economists, “second-round effects.” > But while concerns this time around aren’t totally gone, what’s being discussed more frequently now is the fact that a wage-price spiral has not occurred in the 18 months or so that inflation has been running red-hot in much of the world. > “What we’ve seen in the last year is prices rising very rapidly, but wages have not increased nearly as much, and that’s why we have a cost of living crisis,” Gourinchas said, after noting that core inflation remained high in many countries and in some cases was increasing. > “We should expect wages to catch up eventually and people’s real income to recover,” he said. Real income refers to wages adjusted for inflation, reflecting changes in purchasing power. > But the increase doesn’t present a risk because “the corporate sector has been sitting on pretty comfortable margins,” Gourinchas continued. Businesses’ revenues “have risen faster than costs, and so margins have room to absorb rising labor costs.” Tangentially, Powell cannot destroy aggregate demand via the benchmark rate in a way that materially impacts the unemployment rate due to structural demographics. ~2 million people over the age of 55 die every year in the US. ~3 million Baby Boomers retire every year. 55+ workers clinging to the participation rate is holding a lot of this together. https://www.barrons.com/articles/the-labor-market-bends-toward-scarcity-the-fed-cant-change-that-51670019273 https://www.barrons.com/articles/the-labor-market-bends-towa... https://seekingalpha.com/article/4531829-older-workers-propping-up-us-economy https://seekingalpha.com/article/4531829-older-workers-propp...
- majormajor 3y ago
  If you want to avoid too much blowback you need a scapegoat. The last few years have provided plenty: * pandemic * supply chain disruptions * shifts from services to goods * shifts back The economy doesn't have enough major players for true perfect competition to exist in most industries. Your costs go up a bit? Why not try to get away with passing on some extra to pad your bottom line as well? Who is going to stop you or call you out on it right now? I'm sure I'm not the only person here who's sat in a meeting for a company where there were high-level individuals talking about "how much can we get away with charging" entirely separately from "what are our raw unit costs."
  - pessimizer 3y ago
    > talking about "how much can we get away with charging" entirely separately from "what are our raw unit costs." This is what all rational businesses without real competition do. Using costs to set prices is throwing money away, unless your costs are higher than your prices for a strategic reason and you're calculating how long you can continue doing that before you miss payroll.
    - JohnFen 3y ago
      > This is what all rational businesses without real competition do I disagree with this on two points: not all businesses do this, and this behavior is is not related to whether or not the business is "rational". Some businesses actually do operate in a way that doesn't abuse their customers. Forgoing usurious profit margins doesn't count as "throwing money away" any more than not picking the pockets of people around you counts as "throwing money away".
      - evancox100 3y ago
        Why do you assume that setting a high price or raising prices is "abusing customers"? If customers are paying that price, what's the problem? Are the customers idiots who can't be trusted how to allocate their money? High prices is only "abuse" if there is a monopoly on that good and there is no substitute. Which, yes that is bad, we should stop it. BUT even a true monopoly doesn't explain a generalized increase in prices where consumers do not react to higher prices on A by reducing spending on B. Edit: Of course there is variance in the degree to which owners will pursue profit maximization, up to and including "I am already rich and I will operate this at a loss for the good of the public", but the median (or even 75th percentile) firm I don't think is at "pass all cost savings onto customers even if I'm leaving money on the table."
- bryanlarsen 3y ago
  According to the Planet Money episode, 60% of inflation was due to profit inflation.
  - prepend 3y ago
    What causes profit inflation? Companies are certainly greedy. But usually they can’t raise prices because people can’t pay. Now people can pay, at least for now.
olliej 3y ago
The general "price increases are because of inflation" is trivially disproven: if a company's profit ratio increases after price increases, the price increases are not due to inflation. That politicians get to stand up and say such trivially falsifiable BS without being called out is demonstrative of how much they are owned by businesses.
- ycombinatornews 3y ago
  In this theory, are salaries part of the profit or not? Cause they are not in the accounting scheme of things
  - danaris 3y ago
    I mean, that's part of the absurdity of this all—if the companies raised exec salaries enough to erase the extra profit, it would be much harder to draw a clear line to this phenomenon. But they can't be satisfied with that. They need the stock price to rise, so they need to be able to show record profits. So they boast loudly of their record profits to their investors, while crying crocodile tears to the media about how terrible the supply line problems are, and how the government has handed so much money to the American people in the COVID stimulus (see, $2000/household 3 years ago can totally raise prices across the board for years on end), so these must be the source of all the price increases, don't you see?
    - NoMoreNicksLeft 3y ago
      I was under the impression that except for a few truly extraordinary industrial sectors (or even just one or two companies within them), profit margins are razor thin. So if their normal 2.1% profit margin goes up to 2.104%, isn't that "record profits"? It's not a very interesting story, and won't much rouse the rabble on reddit. I'm not sure that they have to be able to show "record profits" so much as they just have to spin it that way.
- thegrim33 3y ago
  I agree with you 100%, although the issue with your statement is that you mentioned profit ratio, which is the correct metric to look at, whereas 99% of the articles on this topic only look at raw profit numbers, not profit ratio. Article upon article upon article is posted with the same headlines about "company X had record profit numbers this year", but none of these articles ever look at profit ratio. By definition, in times of inflation, even if a company maintains the same exact profit ratio, their raw profit numbers will increase.
jnwatson 3y ago
Why couldn’t this happen before? Competition. If you raised your prices, your competitors would see an opportunity and you’d lose market share Now competition has been consolidated away. With the pandemic, corporations have accidentally entered into an experiment leading to new price discovery. Without competitors, all that’s in the way of increasing prices is consumers’ willingness to buy.
- fuzzfactor 3y ago
  >Why couldn’t this happen before? That's exactly what happened before. During the Nixon recession, leading up to the wage & price freeze. And after the freeze was lifted, the financial power imbalance was no different so inflation went even wilder due to pent-up un-fulfilled greed among the financial leaders whom had to do without growth for a little while there. Even though the value of the dollar was declining due to destabilization, there were less available for the majority of workers/taxpayers, but financialists still needed more of them or the math would have made them look like their greed had failed like never before. They are rewarded on greed numerically in ways that everyone else can not compare. The freeze worked to cement the imbalance leading to the exaggerated wealth inequality we have now. The more apparent income inequality today is minor by comparison, but they were both locked in like never before mainly by pure unchecked greed. Freezing prices didn't help much, but freezing wages even for a little bit was completely counterproductive by setting the workers/taxpayers back many more years by comparison to capital. Those years have grown to generations now.
- mitthrowaway2 3y ago
  It does seem that the corporate landscape is less competitive than it once was. If two brands of cereal are owned by the same parent company, they aren't really competitors. If one hundred parent companies are owned by the same investment index fund, whose management votes on behalf of its investors, are those hundred companies really competitors with each other?
  - mrguyorama 3y ago
    Go look at your cleaning products aisle in your local grocery store. Every single item is created by one of two brands, with a couple items from tiny, niche, lifestyle brands. Every other aisle is the same story. Two or three companies, with a few small groups also throwing a hat in the ring. The grocery store is also owned by one of two companies, with again, a couple small time competitors that haven't been purchased yet.
octobus2021 3y ago
Wait... So, the companies - you know, the entities that SET the prices and exist solely to extract as much profit as they can - are the ones pushing the inflation? Nooooo! That doesn't make any sense!!!!!
notShabu 3y ago
I think one part of this is that it's easier to hike prices when there's a narrative of inflation because it gets lost in the noise. In quieter times, standing out with price increases drives customers to the competition.
- evancox100 3y ago
  The "inflation allows companies to hike prices" theory is circular reasoning, because inflation IS companies hiking prices in mass and not suffering a sales losses sufficient to dissuade them form doing so. It's absolutely true that in an inflationary environment companies hike prices preemptively. That is the phenomenon known as inflation. Missing from similar theories is any explanation of why this happens sometimes and not others.
  - danaris 3y ago
    I think the missing part is the "narrative of". When the media is already talking about there being inflation, especially when they've been talking about it being anticipated for a while before it showed up, that makes it much easier for companies to raise prices and just say, "It's just like everyone's saying! It's just inflation! You can't blame us!" That's not the same as saying "inflation means companies raising prices; it's tautological."
jerf 3y ago
"Once dismissed as a fringe theory, the idea that corporate thirst for profits drives up inflation, aka "greedflation," is now being taken more seriously by economists, policymakers and the business press." Policymakers would like to blame inflation on greedflation. Their syncophants agree with them. What an astonishing coincidence. It's amazing how helpless and feckless our poor ol' policymakers are. Constantly caught out flatfooted and surprised at every turn by how bad things are. Nothing is ever their fault because they're just so shocked and surprised by how things are going. One does find oneself wondering what exactly they're good for if they're so constantly shocked by everything. CTRL-f was sadly missing any mention of "money supply", "printing", "interest rates", "ZIRP", or, indeed, any policy intervention made, ever, in the history of man, by policymakers. How amazing all the power they have, yet they are a flat 0% responsible. It's pretty impressive to be that constantly befuddled and flummuxed, yet have all that power, and never be responsible for anything at all, not even a little. That's a pretty impressive combination of attributes. (Bear in mind I'm open to the possibility that it isn't 100% just the money printing, currency supply, policies, etc. The real world is complicated and policymakers aren't the only actors by a long shot, no question. But if they're truly 0% responsible, fire them, because apparently they're not doing anything. 0% responsibility is impossible.)
- dragontamer 3y ago
  > CTRL-f was sadly missing any mention of "money supply", "printing", "interest rates", "ZIRP", or, indeed, any policy intervention made, ever, in the history of man, by policymakers. Except the largest QE was 2008, 2010, and 2012, which caused... nothing? Anti-QE people have been claiming that QE causes problems for a decade. Eventually COVID19 causes a problem and the QE people come out of the woodwork saying "I TOLD YA SOOOOO", ignoring COVID19 entirely and trying to pretend that they've been right for a decade all along. ------------------ Policy makers get things wrong on occassion. That's cool. But the policy makers got it more correct than the "anti-QE" guys for the entirety of the 2008 through 2020 timespan. Being wrong once every decade is fine. Its better than being wrong for a whole decade and then pretending that your theories finally became correct due to unrelated factors later. I don't expect perfection from our policymakers, nor consistency. I recognize that in a democracy, our policy makers change every 4 to 8 years and we contradict ourselves regularly. But overall, their ability to predict the future remains superior over the typical folk who cry about things like ZeroHedge.
zwieback 3y ago
Planet Money did a great episode explaining the general thinking and how this theory has become more mainstream lately, although "greedflation" is a bad moniker. https://www.npr.org/2023/05/11/1175487806/corporate-profit-price-spiral-wage-debate https://www.npr.org/2023/05/11/1175487806/corporate-profit-p...
BiteCode_dev 3y ago
Why does it have to be one thing?
- Finnucane 3y ago
  It isn't, and this is partly why this kind of price-gouging can go on. Company x, sees a rise of say 5 percent in material cost, 5 percent in labor cost, they raise retail prices 25 percent.
- karaterobot 3y ago
  Did you mean to respond to someone's comment who was making this claim? The article does not make this claim.
bronycapitalims 3y ago
Seriously did we need a new study to explain when a minority control capital they control agency? When a handful have the fiat currency monopoly they can buy up resources and leave less to go around. When an industrial pipeline to make Red Bull needs machines to build machines to build machines to build cans, and the elders in charge grew up thinking in war era supply manufacturing that’s where fiat capital will be diverted. Are these not the fundamentals principles of economics? We’ve added so many BS layers of indirection and obscurantism via academic babble and political chicanery.
bb88 3y ago
There's an episode of The Problem With Jon Stewart about two months ago where he interviews Larry Summers about inflation in general and corporate profits being part of the issue. It's a real good exchange of viewpoints on the matter -- better than you'd get with most other commentary. Relevant clip is here: https://youtu.be/tU3rGFyN5uQ?t=232 https://youtu.be/tU3rGFyN5uQ?t=232
- jldugger 3y ago
  I recall fondly the years of Daily Show with John Stewart, and tried to watch as much of that clip as I could but I just don't think he's qualified to ask useful questions here and the adversarial dialog isn't shedding much light per second. The standard rebuttal seems to be "are corporations greedier today than five years ago" and the likely answer seems to be no. As best I can tell, the supply shock legitimately increased prices, and the pace at which prices are reverting is slowed by profit taking. In theory, high profits should lead to more competitors entering the market, but this is either a laggy response, or stymied by interest rate increases raising the cost of capital formation.
  - bb88 3y ago
    >> I just don't think he's qualified to ask useful questions here I really think you don't give Stewart enough credit. Stewart is an intellectual that chooses comedy as his medium. I think Jon Stewart wouldn't have gotten into that interview if he couldn't hold his own, intellectually. I was recently watching the Stewart/O'Reilly debates from about 10 years ago on Fox News and surprised how well both could lay out their arguments and not end up in a cacophony of noise. Stewart respected O'Reilly as much O'Reilly respected Stewart.
  - enragedcacti 3y ago
    > The standard rebuttal seems to be "are corporations greedier today than five years ago" and the likely answer seems to be no. Does a dog become more greedy for food on the table when you turn your back? A "no" answer doesn't disprove the theory because the theory is only arguing (among other things) that companies are taking advantage of an opportunity that didn't exist 5 years ago, which is consumer expectations of rising prices.
deleted 3y ago
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User23 3y ago
Since when is marginal pricing power a fringe theory? It’s been well known for over a century that a (near) monopoly supplier has pricing power. Heck our entire payment system rests on it. Central banks that issue a floating currency rest their monetary policy implementation on being the monopoly supplier of reserves and thus able to set the price of money along the yield curve. Marginal pricing power is why their interventions usually don’t even have to be very large at all despite the overall huge size of the currency markets.
causality0 3y ago
So if prices are rising faster than costs, where is the money coming from to pay those prices? Loans? Savings accounts?
- Finnucane 3y ago
  Debt. Since wages are generally lagging increases in costs, people are putting more on credit.
- evancox100 3y ago
  1) Excess savings built up during COVID (part stimulus money, part reduced spending on travel, etc.) 2) "Hot" economy with low unemployment
a257 3y ago
In other words, companies raise prices because they can. Businesses being profit-maximizers are hardly anything new. What is novel about "greed"flation is that it introduces the notion that companies are taking advantage of people's expectations that prices will rise, causing inflation. The question is, is this a short-term phenomena (as with most inefficiencies caused by information asymmetries), or will these abnormal increases last? it's hard to say, as it is dealing with behavioral economics.
lucidguppy 3y ago
Downward price pressure from competition only works when there's competition - not monopoly or monopsony.
- prepend 3y ago
  Is there monopoly on groceries? There’s much consolidation in agriculture, but I’m supposed to believe that ConAgra is in cahoots with my local farmers market to both use their monopsony powers to increase everything? Including what’s grown locally?
frankreyes 3y ago
> Charts #6 and #7 are the most important charts that hardly anyone is looking at these days. What they show is that our recent surge in inflation was caused by a surge in deficit spending from 2020 through 2021. As much as $6 trillion of Covid "emergency" spending was effectively monetized, as it accumulated in the nation's savings and deposit accounts (M2). https://scottgrannis.blogspot.com/2023/05/inflation-is-so-over.html?m=1 https://scottgrannis.blogspot.com/2023/05/inflation-is-so-ov...
credit_guy 3y ago
Inflation is due as much to the greed of the sellers as to the willingness of the buyers to part with their money. For most things that we buy we have options. Restaurant prices are too high? You can cook and eat at home. Resorts in Cancun too expensive? You can vacation locally. Tickets to the movie theater more than $20 apiece? Netflix is your friend. Etc, etc.

71 points by danaris 3y ago

The failure at trust bustng causing decreased competition and more market power is one part of why this is questionable. The other shoe that hasn't really dropped in this conversation is that companies hate increasing prices so the game is often to raise prices more a few times rather than many times but for smaller amounts. We will need to look back on this whole price and profit move over the whole government caused supply and demand shock to see if profits are below normal later and somewhat cancel out higher profits now to know if this is happening. To say greed is causing inflation rather than greed is a response to a government caused supply and demand shock is really questionable to me though. It takes away from the major role of bad government policy in the root causes of this situation and puts it on companies responding as profit maximizers (as they always should be) to government created aituations.

Centigonal 3y ago

Definitely! Same with layoffs, and same with "kitchen sink" quarters. Any corporate action that results in negative PR is more likely in an environment where others are doing the same thing, since the negative PR cost is lower when it's a normal industry trend. So we should expect this kind of stairstep behavior.

ls612 3y ago

Greedflation is bullshit because it’s not like companies weren’t greedy in 2019. Inflation has changed between four years ago and today, whatever explanation you want for that needs to have something changing to cause the inflation. Profit maximization attempts are not one of the things that have changed.

JohnFen 3y ago
Not saying this is the explanation, but here's a possibility. True, greed is a constant, but what companies can get away with isn't. It may be the case that companies can get away with putting the screws to everyone harder now than they could prior to 2020.
adrienthebo 3y ago
Profit maximization attempts have changed; supply chain disruptions provided an opportunity for corporations to increase their prices in unison. Prior to the pandemic there was more risk in unilateral price increases but now companies can look at pricing velocity and effectively work as a cartel without engaging in explicit conspiracy.
- megaman821 3y ago
  Either people have more money to absorb these cost increases or demand for some other non-essential goods is tanking. If it wasn't the government printing a bunch of money and it ending up in people hands to buy essential things, what are the non-essential things that no one is buying anymore?
camgunz 3y ago
Greedflation is the phenomenon whereby corporations increase their prices to chase higher profits, hoping that they can blame it on "inflation". This then intensifies inflation. I think everyone--including people like Jerome Powell--agrees this is happening.
- toomuchtodo 3y ago
  > "If corporate profits were to decline from the extremely high levels that we saw recently, would it be possible to sustain" growth in workers' benefits "even as we get inflation down to the target of 2%?" Democratic Senator Chris Van Hollen asked Powell during the Fed chief's semi-annual testimony before the U.S. Senate Banking Committee. > While that might be difficult in the long run, "over the shorter term though, yes," Powell said, dipping tentatively into a debate that may become more pointed over time depending on how inflation, the job market and the economy evolve. https://www.reuters.com/markets/us/feds-powell-acknowledges-slimmer-corporate-profits-could-help-curb-inflation-2023-03-07/ https://www.reuters.com/markets/us/feds-powell-acknowledges-...
  - octobus2021 3y ago
    In the same article: "Wages affect prices and prices affect wages," Powell said, associating current earnings growth to the current ultra-low unemployment rate of 3.4%, and suggesting the labor market may need to weaken at least somewhat for inflation to fall. meaning that in his opinion inflation is driven by high employment, aka people spending money like crazy because they have more money that they know what to do with, and the solution is to make sure more people are out of work and with less funds to spend. Perfectly logical solution to producer-driven inflation I guess.
    - toomuchtodo 3y ago
      https://www.cnbc.com/2023/04/21/why-economists-are-no-longer-so-worried-about-a-wage-price-spiral.html https://www.cnbc.com/2023/04/21/why-economists-are-no-longer... > The experts were worried about a so-called wage-price spiral. This occurs when workers expect inflation to keep rising, so demand — and achieve — higher salaries to keep up with price rises. Businesses then raise the prices of goods and services to cover higher labor costs, at the same time as workers have more disposable income to increase demand. This creates an inflationary loop, or in the language of economists, “second-round effects.” > But while concerns this time around aren’t totally gone, what’s being discussed more frequently now is the fact that a wage-price spiral has not occurred in the 18 months or so that inflation has been running red-hot in much of the world. > “What we’ve seen in the last year is prices rising very rapidly, but wages have not increased nearly as much, and that’s why we have a cost of living crisis,” Gourinchas said, after noting that core inflation remained high in many countries and in some cases was increasing. > “We should expect wages to catch up eventually and people’s real income to recover,” he said. Real income refers to wages adjusted for inflation, reflecting changes in purchasing power. > But the increase doesn’t present a risk because “the corporate sector has been sitting on pretty comfortable margins,” Gourinchas continued. Businesses’ revenues “have risen faster than costs, and so margins have room to absorb rising labor costs.” Tangentially, Powell cannot destroy aggregate demand via the benchmark rate in a way that materially impacts the unemployment rate due to structural demographics. ~2 million people over the age of 55 die every year in the US. ~3 million Baby Boomers retire every year. 55+ workers clinging to the participation rate is holding a lot of this together. https://www.barrons.com/articles/the-labor-market-bends-toward-scarcity-the-fed-cant-change-that-51670019273 https://www.barrons.com/articles/the-labor-market-bends-towa... https://seekingalpha.com/article/4531829-older-workers-propping-up-us-economy https://seekingalpha.com/article/4531829-older-workers-propp...
majormajor 3y ago
If you want to avoid too much blowback you need a scapegoat. The last few years have provided plenty: * pandemic * supply chain disruptions * shifts from services to goods * shifts back The economy doesn't have enough major players for true perfect competition to exist in most industries. Your costs go up a bit? Why not try to get away with passing on some extra to pad your bottom line as well? Who is going to stop you or call you out on it right now? I'm sure I'm not the only person here who's sat in a meeting for a company where there were high-level individuals talking about "how much can we get away with charging" entirely separately from "what are our raw unit costs."
- pessimizer 3y ago
  > talking about "how much can we get away with charging" entirely separately from "what are our raw unit costs." This is what all rational businesses without real competition do. Using costs to set prices is throwing money away, unless your costs are higher than your prices for a strategic reason and you're calculating how long you can continue doing that before you miss payroll.
  - JohnFen 3y ago
    > This is what all rational businesses without real competition do I disagree with this on two points: not all businesses do this, and this behavior is is not related to whether or not the business is "rational". Some businesses actually do operate in a way that doesn't abuse their customers. Forgoing usurious profit margins doesn't count as "throwing money away" any more than not picking the pockets of people around you counts as "throwing money away".
    - evancox100 3y ago
      Why do you assume that setting a high price or raising prices is "abusing customers"? If customers are paying that price, what's the problem? Are the customers idiots who can't be trusted how to allocate their money? High prices is only "abuse" if there is a monopoly on that good and there is no substitute. Which, yes that is bad, we should stop it. BUT even a true monopoly doesn't explain a generalized increase in prices where consumers do not react to higher prices on A by reducing spending on B. Edit: Of course there is variance in the degree to which owners will pursue profit maximization, up to and including "I am already rich and I will operate this at a loss for the good of the public", but the median (or even 75th percentile) firm I don't think is at "pass all cost savings onto customers even if I'm leaving money on the table."
bryanlarsen 3y ago
According to the Planet Money episode, 60% of inflation was due to profit inflation.
- prepend 3y ago
  What causes profit inflation? Companies are certainly greedy. But usually they can’t raise prices because people can’t pay. Now people can pay, at least for now.

olliej 3y ago

The general "price increases are because of inflation" is trivially disproven: if a company's profit ratio increases after price increases, the price increases are not due to inflation. That politicians get to stand up and say such trivially falsifiable BS without being called out is demonstrative of how much they are owned by businesses.

ycombinatornews 3y ago
In this theory, are salaries part of the profit or not? Cause they are not in the accounting scheme of things
- danaris 3y ago
  I mean, that's part of the absurdity of this all—if the companies raised exec salaries enough to erase the extra profit, it would be much harder to draw a clear line to this phenomenon. But they can't be satisfied with that. They need the stock price to rise, so they need to be able to show record profits. So they boast loudly of their record profits to their investors, while crying crocodile tears to the media about how terrible the supply line problems are, and how the government has handed so much money to the American people in the COVID stimulus (see, $2000/household 3 years ago can totally raise prices across the board for years on end), so these must be the source of all the price increases, don't you see?
  - NoMoreNicksLeft 3y ago
    I was under the impression that except for a few truly extraordinary industrial sectors (or even just one or two companies within them), profit margins are razor thin. So if their normal 2.1% profit margin goes up to 2.104%, isn't that "record profits"? It's not a very interesting story, and won't much rouse the rabble on reddit. I'm not sure that they have to be able to show "record profits" so much as they just have to spin it that way.
thegrim33 3y ago
I agree with you 100%, although the issue with your statement is that you mentioned profit ratio, which is the correct metric to look at, whereas 99% of the articles on this topic only look at raw profit numbers, not profit ratio. Article upon article upon article is posted with the same headlines about "company X had record profit numbers this year", but none of these articles ever look at profit ratio. By definition, in times of inflation, even if a company maintains the same exact profit ratio, their raw profit numbers will increase.

jnwatson 3y ago

Why couldn’t this happen before? Competition. If you raised your prices, your competitors would see an opportunity and you’d lose market share Now competition has been consolidated away. With the pandemic, corporations have accidentally entered into an experiment leading to new price discovery. Without competitors, all that’s in the way of increasing prices is consumers’ willingness to buy.

fuzzfactor 3y ago
>Why couldn’t this happen before? That's exactly what happened before. During the Nixon recession, leading up to the wage & price freeze. And after the freeze was lifted, the financial power imbalance was no different so inflation went even wilder due to pent-up un-fulfilled greed among the financial leaders whom had to do without growth for a little while there. Even though the value of the dollar was declining due to destabilization, there were less available for the majority of workers/taxpayers, but financialists still needed more of them or the math would have made them look like their greed had failed like never before. They are rewarded on greed numerically in ways that everyone else can not compare. The freeze worked to cement the imbalance leading to the exaggerated wealth inequality we have now. The more apparent income inequality today is minor by comparison, but they were both locked in like never before mainly by pure unchecked greed. Freezing prices didn't help much, but freezing wages even for a little bit was completely counterproductive by setting the workers/taxpayers back many more years by comparison to capital. Those years have grown to generations now.
mitthrowaway2 3y ago
It does seem that the corporate landscape is less competitive than it once was. If two brands of cereal are owned by the same parent company, they aren't really competitors. If one hundred parent companies are owned by the same investment index fund, whose management votes on behalf of its investors, are those hundred companies really competitors with each other?
- mrguyorama 3y ago
  Go look at your cleaning products aisle in your local grocery store. Every single item is created by one of two brands, with a couple items from tiny, niche, lifestyle brands. Every other aisle is the same story. Two or three companies, with a few small groups also throwing a hat in the ring. The grocery store is also owned by one of two companies, with again, a couple small time competitors that haven't been purchased yet.

octobus2021 3y ago

Wait... So, the companies - you know, the entities that SET the prices and exist solely to extract as much profit as they can - are the ones pushing the inflation? Nooooo! That doesn't make any sense!!!!!

notShabu 3y ago

I think one part of this is that it's easier to hike prices when there's a narrative of inflation because it gets lost in the noise. In quieter times, standing out with price increases drives customers to the competition.

evancox100 3y ago
The "inflation allows companies to hike prices" theory is circular reasoning, because inflation IS companies hiking prices in mass and not suffering a sales losses sufficient to dissuade them form doing so. It's absolutely true that in an inflationary environment companies hike prices preemptively. That is the phenomenon known as inflation. Missing from similar theories is any explanation of why this happens sometimes and not others.
- danaris 3y ago
  I think the missing part is the "narrative of". When the media is already talking about there being inflation, especially when they've been talking about it being anticipated for a while before it showed up, that makes it much easier for companies to raise prices and just say, "It's just like everyone's saying! It's just inflation! You can't blame us!" That's not the same as saying "inflation means companies raising prices; it's tautological."

jerf 3y ago

"Once dismissed as a fringe theory, the idea that corporate thirst for profits drives up inflation, aka "greedflation," is now being taken more seriously by economists, policymakers and the business press." Policymakers would like to blame inflation on greedflation. Their syncophants agree with them. What an astonishing coincidence. It's amazing how helpless and feckless our poor ol' policymakers are. Constantly caught out flatfooted and surprised at every turn by how bad things are. Nothing is ever their fault because they're just so shocked and surprised by how things are going. One does find oneself wondering what exactly they're good for if they're so constantly shocked by everything. CTRL-f was sadly missing any mention of "money supply", "printing", "interest rates", "ZIRP", or, indeed, any policy intervention made, ever, in the history of man, by policymakers. How amazing all the power they have, yet they are a flat 0% responsible. It's pretty impressive to be that constantly befuddled and flummuxed, yet have all that power, and never be responsible for anything at all, not even a little. That's a pretty impressive combination of attributes. (Bear in mind I'm open to the possibility that it isn't 100% just the money printing, currency supply, policies, etc. The real world is complicated and policymakers aren't the only actors by a long shot, no question. But if they're truly 0% responsible, fire them, because apparently they're not doing anything. 0% responsibility is impossible.)

dragontamer 3y ago
> CTRL-f was sadly missing any mention of "money supply", "printing", "interest rates", "ZIRP", or, indeed, any policy intervention made, ever, in the history of man, by policymakers. Except the largest QE was 2008, 2010, and 2012, which caused... nothing? Anti-QE people have been claiming that QE causes problems for a decade. Eventually COVID19 causes a problem and the QE people come out of the woodwork saying "I TOLD YA SOOOOO", ignoring COVID19 entirely and trying to pretend that they've been right for a decade all along. ------------------ Policy makers get things wrong on occassion. That's cool. But the policy makers got it more correct than the "anti-QE" guys for the entirety of the 2008 through 2020 timespan. Being wrong once every decade is fine. Its better than being wrong for a whole decade and then pretending that your theories finally became correct due to unrelated factors later. I don't expect perfection from our policymakers, nor consistency. I recognize that in a democracy, our policy makers change every 4 to 8 years and we contradict ourselves regularly. But overall, their ability to predict the future remains superior over the typical folk who cry about things like ZeroHedge.

zwieback 3y ago

Planet Money did a great episode explaining the general thinking and how this theory has become more mainstream lately, although "greedflation" is a bad moniker. https://www.npr.org/2023/05/11/1175487806/corporate-profit-price-spiral-wage-debate https://www.npr.org/2023/05/11/1175487806/corporate-profit-p...

BiteCode_dev 3y ago

Why does it have to be one thing?

Finnucane 3y ago
It isn't, and this is partly why this kind of price-gouging can go on. Company x, sees a rise of say 5 percent in material cost, 5 percent in labor cost, they raise retail prices 25 percent.
karaterobot 3y ago
Did you mean to respond to someone's comment who was making this claim? The article does not make this claim.

bronycapitalims 3y ago

Seriously did we need a new study to explain when a minority control capital they control agency? When a handful have the fiat currency monopoly they can buy up resources and leave less to go around. When an industrial pipeline to make Red Bull needs machines to build machines to build machines to build cans, and the elders in charge grew up thinking in war era supply manufacturing that’s where fiat capital will be diverted. Are these not the fundamentals principles of economics? We’ve added so many BS layers of indirection and obscurantism via academic babble and political chicanery.

bb88 3y ago

There's an episode of The Problem With Jon Stewart about two months ago where he interviews Larry Summers about inflation in general and corporate profits being part of the issue. It's a real good exchange of viewpoints on the matter -- better than you'd get with most other commentary. Relevant clip is here: https://youtu.be/tU3rGFyN5uQ?t=232 https://youtu.be/tU3rGFyN5uQ?t=232

jldugger 3y ago
I recall fondly the years of Daily Show with John Stewart, and tried to watch as much of that clip as I could but I just don't think he's qualified to ask useful questions here and the adversarial dialog isn't shedding much light per second. The standard rebuttal seems to be "are corporations greedier today than five years ago" and the likely answer seems to be no. As best I can tell, the supply shock legitimately increased prices, and the pace at which prices are reverting is slowed by profit taking. In theory, high profits should lead to more competitors entering the market, but this is either a laggy response, or stymied by interest rate increases raising the cost of capital formation.
- bb88 3y ago
  >> I just don't think he's qualified to ask useful questions here I really think you don't give Stewart enough credit. Stewart is an intellectual that chooses comedy as his medium. I think Jon Stewart wouldn't have gotten into that interview if he couldn't hold his own, intellectually. I was recently watching the Stewart/O'Reilly debates from about 10 years ago on Fox News and surprised how well both could lay out their arguments and not end up in a cacophony of noise. Stewart respected O'Reilly as much O'Reilly respected Stewart.
- enragedcacti 3y ago
  > The standard rebuttal seems to be "are corporations greedier today than five years ago" and the likely answer seems to be no. Does a dog become more greedy for food on the table when you turn your back? A "no" answer doesn't disprove the theory because the theory is only arguing (among other things) that companies are taking advantage of an opportunity that didn't exist 5 years ago, which is consumer expectations of rising prices.

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User23 3y ago

Since when is marginal pricing power a fringe theory? It’s been well known for over a century that a (near) monopoly supplier has pricing power. Heck our entire payment system rests on it. Central banks that issue a floating currency rest their monetary policy implementation on being the monopoly supplier of reserves and thus able to set the price of money along the yield curve. Marginal pricing power is why their interventions usually don’t even have to be very large at all despite the overall huge size of the currency markets.

causality0 3y ago

So if prices are rising faster than costs, where is the money coming from to pay those prices? Loans? Savings accounts?

Finnucane 3y ago
Debt. Since wages are generally lagging increases in costs, people are putting more on credit.
evancox100 3y ago
1) Excess savings built up during COVID (part stimulus money, part reduced spending on travel, etc.) 2) "Hot" economy with low unemployment

a257 3y ago

In other words, companies raise prices because they can. Businesses being profit-maximizers are hardly anything new. What is novel about "greed"flation is that it introduces the notion that companies are taking advantage of people's expectations that prices will rise, causing inflation. The question is, is this a short-term phenomena (as with most inefficiencies caused by information asymmetries), or will these abnormal increases last? it's hard to say, as it is dealing with behavioral economics.

lucidguppy 3y ago

Downward price pressure from competition only works when there's competition - not monopoly or monopsony.

prepend 3y ago
Is there monopoly on groceries? There’s much consolidation in agriculture, but I’m supposed to believe that ConAgra is in cahoots with my local farmers market to both use their monopsony powers to increase everything? Including what’s grown locally?

frankreyes 3y ago

> Charts #6 and #7 are the most important charts that hardly anyone is looking at these days. What they show is that our recent surge in inflation was caused by a surge in deficit spending from 2020 through 2021. As much as $6 trillion of Covid "emergency" spending was effectively monetized, as it accumulated in the nation's savings and deposit accounts (M2). https://scottgrannis.blogspot.com/2023/05/inflation-is-so-over.html?m=1 https://scottgrannis.blogspot.com/2023/05/inflation-is-so-ov...

credit_guy 3y ago

Inflation is due as much to the greed of the sellers as to the willingness of the buyers to part with their money. For most things that we buy we have options. Restaurant prices are too high? You can cook and eat at home. Resorts in Cancun too expensive? You can vacation locally. Tickets to the movie theater more than $20 apiece? Netflix is your friend. Etc, etc.