Despite the cost-of-living crisis, big companies continue raking in massive profits. In the UK, 11% of firms account for 90% of overall market profit increase. This is inflation caused by corporate greed – ‘Greedflation’.
My Marxist Economics professor theorised a model suggesting big companies, especially in the energy and food sector, are inflating the economy. According to him, the government must step in to protect the people, and tax these “greedy” companies. He is completely wrong.
Greedflation proponents do not understand the basic laws of supply and demand. To break things into simpler terms, generally, prices tend to rise when demand in the market exceeds its relative supply, this is Economics 101. In recent times, the Russia-Ukraine war has led to a shortage of supply of oil and gas relative to its demand, consequently soaring up its prices.
Rising prices in the energy sector have a domino effect on food sector prices since the food industry is a major consumer of energy and oil. Studies including Mbah and Wasum (2022) highlighted crises like Russia-Ukraine lead to higher prices not in one sector, but have an overall impact on the prices. The above study also pointed out that crises not only impact the price level, but also reduce household consumption caused by the increase in overall prices, disrupt supply chain, and economic growth impediments. Greedflation enthusiasts argue the rise in the food sector, as well as the energy sector, is due to the exploitative position of capitalists. To overcome their increased costs due to rising energy prices, businesses and entrepreneurs in the food sector like supermarkets also raise their prices.
The core of the greedflation narrative is that producers’ profit margins have increased while the rest of the world is suffering from higher inflation rates, thus indicating the greed for profits is raising the prices. The big corporations are exploiting their positional power in the market by setting up prices of their products extremely high. The Economist highlighted the findings of the IMF, suggesting the higher profits “account for almost half of the increased prices”.
In addition, the Economic Policy Institute (EPI) suggests profit margins have increased since 2020. However, the mere increase in profit margins is insufficient evidence to support the argument that corporate greed is raising the prices in the economy. Others have suggested there is a correlation between profits and inflation, but the causal relationship between the two is unknown. Given the lack of information on the causal relationship between profits and prices, it is absurd and radical to assume that hunger for profits is driving the prices up.
Dickens (2022), in his interview with Northeastern Global News, argued there is definitely a domino effect of energy prices on food prices. Corporates are futuristic, they tend to increase prices when anticipated an increase in the cost of production. However, that does not imply that corporations are charging high prices to increase their profit margins. In the absence of anticipatory price-increasing, companies could not have increased their prices, despite having so-called market leverage. It is because market power is not as concentrated as greedflation enthusiasts perceive it to be. If the market power was concentrated, we would have seen greedflation along time ago and not just after the pandemic.
There are several factors greedflation supporters are not considering which are impacting the price levels, such as Covid-19, the Russia-Ukraine war, and now the Israel- Palestine war. During recent times the world witnessed major events under which the lack of supply of goods like oil resulted in skyrocketing prices. The fact that all ongoing occurrences happened one after the other did not provide enough time for supply to catch up with demand, thus not helping with falling prices.
People claiming corporate greed is raising the prices in the economy are wrong. The reasoning behind high prices are more than what ‘greedflation’ enthusiasts perceive it to be. Prices in the energy and food sectors have increased due to a relative supply shortage of oil. Factors such as the Covid-19 pandemic, and conflicts like the Russia- Ukraine and Israel-Palestine wars disrupted supply, preventing oil supply from meeting demand and keeping prices high. Additionally, with no evidence suggesting a causal relationship between prices and profits, arguments that greed is driving up the prices are groundless.
