You can call it greedflation. You can call it price-gouging. You can be polite and call it profit-led inflation, middleman inflation, excuse-flation or sellers’ inflation. But whatever you call it, it is back. And that is not a good thing.
What is greedflation?
Societe Generale’s Albert Edwards is, he says, shocked. In his four-decade career he has never seen anything quite like the “astonishing” extent to which companies are indulging in what he calls greedflation (Edwards has no need to be polite).
So what is it and what makes today’s bout of it so astonishing? Normal inflation is a function of rising (or stable) demand, and sharply shrinking supply. An imbalance. The former is the type we saw in early 2020, as everyone rushed out to buy large lockdown TVs. The latter kicked in later that year as the lockdown destroyed supply chains.
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Greedflation is different. It happens when demand is stable but there is a story of some kind in the public domain that makes your customers believe an outsized price rise is necessary.
A story such as, say, a war in Ukraine, a pandemic wiping out the world’s chickens or a scary semi-conductor shortage. Get a good one and you can pass on a legitimate cost increase but also bung a few extra percentage points on top. The extra gets caught up in the story, bamboozled consumers pay up and profits bounce.
Here’s a US bakery owner explaining it to Bloomberg: “Whether it’s rye flour, or bird flu that impacts eggs, when it makes national news... it’s an opportunity to increase the prices without getting a whole bunch of complaining from the customers.” Bonuses all round.
In normal circumstances this wouldn’t last. Capitalism is generally self-correcting – competitors slash prices to take market share, and margins (and inflation) fall back. Look back as long as we have records, says Edwards, and you can see that profit margins have always been mean-reverting. This time, however, the mechanism seems a bit clogged up.
More than half of EU inflation is now a direct result of profit growth. There is evidence of the same in the US. Earlier this year Isabella Weber and Evan Wasner of the University of Massachusetts had a good look at the data in a paper called Sellers’ Inflation, Profits and Conflict: Why Can Large Firms Hike Prices in an Emergency? In it they note that the “overlapping emergencies” and the reporting of those emergencies in the last few years have handed a fabulous gouging opportunity to retailers, legitimising price rises and “creating acceptance” on the part of consumers. “This renders demand less elastic,” something that gives companies cover to all raise prices together – something they can’t usually do.
The result? US corporate profit margins hit a record 13.5% in the second quarter of 2021, even as oil, gas, freight and food prices fell back. The share of the economy taken up by corporate profits is now higher than at any time since 1929. This, then, is “predominantly a sellers’ inflation that derives from the ability of firms with market power to hike prices”. The same dynamic is on the go in Canada, where grocery store prices are reaching record highs but farmers are seeing little, if any, of that price growth (the National Farmers Union says retail prices have completely “decoupled” from food input prices). It is the same story in the UK, where food inflation is nearly 20%.
The best thing to do is nothing
So what is to be done? Politicians have ideas: there is nothing they like more than an opportunity to place the blame for tricky things on companies. Liberal Democrat leader Ed Davey wants the government to assess whether retailers have been “profiteering” in the cost-of-living crisis, and you will have heard many mentions of price controls. Even Edwards, generally a pretty red-in-tooth-and-claw capitalist, thinks that there could now be a case for price controls (even though they have never worked) because “something seems to have broken with capitalism”. We are not so sure. Consumers might have been tolerant so far. But there is reason to think they won’t be much longer.
Firstly, if consumers can’t pay, they won’t pay, and the fiscal buffers most people built up in the pandemic are now fast disappearing – just as rate rises start to be felt in mortgage rates and the effects of negative real wage growth are sinking in. The people who feel forced to strike for higher wages are not also going to be the people who give the corporate world a long-term free pass. Secondly, companies need to have an eye to their brands. Brand damage is very easy to cause and very hard to fix (yes, looking at you, Nike). Bolstering margins worked just fine when greedflation was only discussed in the odd broker’s note. It doesn’t work so well when it has its own hashtag on Twitter, consumers’ resentment is growing and politicians are looking for scapegoats.
Finally the world’s CEOs, while greedy, are not necessarily also stupid: they will have read the same mutterings about price controls we have, and they will know they need to stop the conversation in its tracks: doing so might cost them a few points of margin in the short term to do so but it will save them a lot more long term. The concerned might note that Tesco recently made a noise about cutting the price of four pints of milk by 10p and the cost of a pint by 5p. Sainsbury’s immediately followed suit. We live in a something-must-be-done world. But the best thing to do about greedflation (for now) is absolutely nothing.
Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
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