Greedflation occurs when the Profit-Price spiral gains momentum instead of the Wage-Price Spiral
Greedflation, like Bidenomics or Bidenflation, is a loaded term. Many countries around the world are witnessing sharp increases in inflation rates. There are many causes for this unprecedented surge in prices but we can trickle it down to two main reasons: The covid-19 pandemic and Russia-Ukraine war.
What is Greedflation?
Greedflation is basically the combination of two words: ‘Greed’ and ‘Inflation’. It is characterized by the notion that inflation is driven by corporate greed, hence the term ‘Greedflation’. We have already seen in news frequently about central banks increasing interest rates to control inflation. The banks usually raise the interest rate to manage demand, control inflation, and avoid the wage-price spiral. Fiscal policies must be used to control the price hike pressures. The wage-rate spiral mainly occurs when the rising prices cause an increase in wages, which induces further price increases. When all this happens, the central banks intervene with their fiscal policy measure to bring price stability.
Greedflation occurs when the Profit-Price spiral gains momentum instead of the Wage-Price Spiral. The Profit-Price Spiral happens when corporate companies raise their prices excessively to increase their profits, which also contributes to inflation. Businesses may exploit dire situations like natural disasters by increasing prices for higher profits.
Many experts and analysts have argued that after the pandemic, many business corporations have used the situation to their benefit by increasing prices in order to gain profit.
How is it bad?
The main goal of companies is usually profits and they try to charge a price that would maximize their gains. These profits would in fact help them sustain their businesses. So it is not a practical idea to ignore profits altogether. So when does it get bad? There is something called price gouging, where the prices of commodities are pushed higher beyond their usual range. And at this point, the normal working of a capitalist economy wanders into exploitation. When the companies get the hang of this profit-led inflation, thinks that customer would pay extra. In such cases, the profit motive can become the driver of inflation. But experts suggest that they don’t last much.
Affecting the economy
According to experts, it would be better if executives cut their margins when inflation happens and union leaders fix the wage deals below the inflation level. But that rarely happens as it is not in the direct interest of their members and shareholders. If the pricing power, however, is higher than it used to be, it will create problems.
For some managements, inflation is a good sign. The producer price index and import prices have increased recently but started to decline and this supports a brightening outlook for S&P 500 core margins, reports Bloomberg. Margins get better when there is inflation. But when the inflation begins to cool off, the managers face the incentive to slow that process by widening their markups. This is the point where the incentives of the corporate executives won’t go hand in hand with the central bank.
Companies are also trying to boost their margins and this could be done by raising the prices or by laying off employees, which will both affect the economy in negative ways. From the point of view of equity investors, the main aim is to find the ones with real pricing power.
In order to maintain the margins, companies would have to adopt measures that will be risky. Corporate margins, to this date, did not have much effect on the rise of inflation. But they have a considerable role in determining the way the economy moves.