> While this obviously contributed to rising prices, the report finds that company profits increased at a much faster rate than costs did, in a process often dubbed “greedflation.”
I think there is this expectation that companies "should" only raise prices necessary to cover their cost increases. But companies charge what the market can bear and, depending on the specific circumstances, this could be equal to, less than, or more than the cost increases.
To use a HN-friendly example, let's say AWS cuts their EC2 costs. If you're providing an undifferentiated computation service using EC2, you'll likely have to cut your costs or you will lose all your business to your competitors. If you're providing a highly differentiated SaaS product, you can probably keep the cost savings to yourself.
You can reason in the opposite direction for price hikes. Depending on the exact company in question, they could be in a privileged position of the supply chain or have marketing power that allows them to increase prices even more.
One main difference here is price stickiness [1], i.e. prices tend to be fixed for a period of time, even if the underlying economics has changed. I think this is underlying reason for perceptions of "greedflation" because, during period of inflation, prices become less sticky and companies use this to adjust prices to better match the underlying economics.
In a free and competitive markets, this would not have happened, or at least would quickly be corrected for by new sellers.
This is solid evidence that we do not have a free and competitive marketplace for most goods and services. That is the problem and its gets worse every day.
It still fucking sucks that price increases put even more pressure on people under and around the poverty line.
The economy isn't just some abstract numbers game, there are real people living in it.
The expectation that companies shouldn't juice more money out of customers who will suffer (or at the very least have to lower their living standards, which isn't as bad but is still not awesome) because of it is a very justified one.
There are no free lunches. The idea that inflation can be curbed by companies being more empathetic is wrong. If they don't raise prices during a spate of inflation, then they'll have to fire workers or make other cuts.
2. but also if other countries print money, it can still cause inflation in your country.
3. and you can't stop them from doing that.
So "don't do it" won't save you. You also need diplomacy and an army.
Also, a better explanation of the theory isn't "money printing" but "higher money velocity" aka MV=PY, which is why it's managed with interest rate hikes.
A day ago: "Greedflation: Corporate profiteering 'significantly' boosted global prices,study"[0] (218 points, 172 comments, different URL, same source)
There's a theory, price-over-volume, that the sudden shift in demand and expectation of inflation gave companies room to explore a different point on the revenue curve, where they increase the price and simply sell less volume. Prior to the pandemic this was risky and people assumed they were near optimal already. During the pandemic a bunch of companies learned they could push on price, sell less, but still make more revenue. All companies did this independently and simultaneously so the usual competitive effects didn't kick in. And now we're at a new equilibrium that the few companies in each industry are happy with.
Plenty of industries raised prices with very little effect on volume, however, it was not truly "independent", companies can easily coordinate by sending signals via forecasts, press releases, news leaks, etc. If P&G and Unilever both decide to raise the price of soap and toothpaste, are you going to shower or brush less? Meanwhile demand exploded on discretionary spending like travel, restaurants and recreation despite price increases.
Of course I don't mean to imply they operate in a vacuum. They can obviously see competitors raising their prices. I just mean to say they don't get into a room and actively decide on a price.
The linked study explains this, it's a mix-up of market power, global shake-ups, supply chain issues, and essential needs that affected normal market forces to self-regulate.
You've got these big companies that dominate and make it tough for competitors to get a foot in the door.
The pandemic threw supply chains into a tailspin, leaving folks with fewer choices and companies with the goods charging top dollar. Post Covid/Ukraine, these same companies found themselves suddenly holding all the cards, letting them hike prices.
Everyone kinda expected to shell out more, because of the looming inflation, so companies were able to slide in bigger price tags under the radar. And this was all for stuff people can't live without, like energy, so they payed up even if it hurts. And it's not really clear to average folks what these companies real cost are, so it's easy to believe the price increase are all legitimate and due to some "real increase in cost".
Market forces amount to "the price is what people are willing to pay." You dump a bunch of paychecks in the bank accounts of every american for 2 years, they're willing to pay more. All these arguments about the price going up due to money printing vs due to price gouging are a red herring. Whenever money is printed, capital gets soaked up by someone. When it's given to banks, they employ economists, so they soak up as much as they can. When it's given to regular people they thank their lucky stars that they can now afford what they're about to run to the store to blow it on, the people selling the things they want profit. Debasing the money always hurts the little guy, no matter whether he's the recipient of the newly minted money or not.
We need effective anti-trust regulation to keep markets competitive. And that hasn't been the case for decades.
A huge % of the goods & services in this world are in the hands of a couple dozen massive conglomerates, after endless consolidation.
This particular narrative seems so believable to me, that a couple companies lead the way jacking up prices in a time of crisis while bandying about shitty airless crap about inflation & costs while profits soared. The very big giants doing this set a precedent & narrative, created a vibe that could perpetuate & extend greedflation. The exact same hype & fury lead us to believe retail theft was astronomically worse: again, now that the chips are falling, we see: this was a boldfaced lie.
Without looking it up, do you know what a monopsony is? If so, why are you claiming any given middleman business is only one of them and not the other? Since they have opposite effects.
I also don't think the monopoly model applies outside industries like energy where there's obvious physical reasons to have one, but there are reasons it helps to grant one to a business in exchange for heavier oversight. It's hard to regulate a lot of small companies.
In general though, "big monopoly corporations" causing everything is a leftover of 70s New Leftism, which was a failure and worse than their prior Marxist analysis.
Not sure if you're being sarcastic, but in case you weren't:
Normally when a business raises costs, regular customers react by blaming the business and taking their business elsewhere.
But when all your customers are reading headlines about inflation, you kind of get a free pass to raise prices on your customers, and direct their ire toward the ambiguous specter of "inflation", regardless of whether or not you actually need to raise prices. When your competitor across the street sees you do this, and sees your customers still patronizing your business, and your profits skyrocketing, they do the same.
Some portion of inflation was real, but a nontrivial part was simple herd mentality by the businesses and using pricing psychology to exploit their customers' irrational decision making.
Due to aggregate supply constraints due to the pandemic there were not enough aggregate goods. Also the pandemic dramatically constrained spending and increased savings, which then rebounded sharply after it was done, creating a tidal wave of aggregate demand. The result was rising prices.
And that is against a background of 10 years of ZIRP and the government threw money at corporations through PPP and blunted the effect of the pandemic recession and we were clearly against the inflection point of the short-term phillips curve.
Market forces should entirely predict all of this.
(And companies are ALWAYS ALWAYS ALWAYS "greedy", the headline line should probably be something like "Millennials wake up one morning and discover how capitalism has worked all along [SHOCKED]").
Ah, gotcha. I was responding to a comment which suggested that there was a lack of market forces due to the existence of monopolies, which makes very little sense in the context of the OP.
Any theory that suggests a grand conspiracy involving most of the companies in the country (and world) simultaneously all changing their behavior in an immoral way, in tandem, is a pretty much instant rejection for me.
That article provides no data to show that the conglomerates mentioned “own nearly everything”. It would be quite easy to add up their US revenues and compare that number to US consumer spending, but they didn’t even bother. In addition to the post’s polemical nature, it is crammed full of pop-up autoplay ads.
Plenty of goods with substitutes (ex: fast food items) have increased substantially in price since the pandemic. People are more than willing to pay historically higher prices for plenty of items that could be replaced with cheaper items.
If people are willing to pay these prices, why should companies not be raising their prices?
There has been an enormous increase in net worth of all age brackets in the US in the last few years (as of 2022 data[1]), all data points adjusted for inflation. I think this is enough to explain why consumers are paying for these items.
Feel free to experiment with this graph tool from the US Federal Reserve's website and please respond if you have any other explanations:
Net worth went up but pre-tax family income is pretty flat. This tells a story that I'm familiar with: those that can afford to invest made a lot of money, but everyday workers are no better off. You don't pay for food by selling property. So these graphs aren't convincing to me of the story you're trying to tell.
Food is an interesting one. In my experience the value of fast food is at an all time low. Before it would be half the price of a sit down place. Nowadays it's more like 80% of the price. I'm not sure what exactly happened there. I went to subway and my bill was $15. I went to a sitdown place and my bill was $19.
> those that can afford to invest made a lot of money, but everyday workers are no better off
According to those graphs, even the bottom quartile saw a substantial increase in net worth during the pandemic [1]. Sure, this is much less in absolute terms than the higher quartiles, but as a percentage increase it's actually far higher (almost 1000% between 2019 and 2022).
This doesn't detract from your point that poorer people don't benefit much from capital gains, but I think it's still worth pointing out.
A company being part of the supply chain for a lot of goods certainly means something but it doesn't mean they "own everything". They have suppliers of their own, and are themselves suppliers to other companies (grocery stores) before it gets to you.
Which one is the most aligned with your interests is a difficult question, or at least not one I know the answer to, but it's probably not whichever one is the smallest business.
Companies don't consider seeking additional profits to be "immoral." Nor did they change behavior, not radically, at least. Companies saw fear, chaos and a lack of resistance from the buying public regarding pricing, and adjusted accordingly.
Personally I don't consider this "greedflation," but post-pandemic economics exposed that the equilibrium between producers and consumers was vulnerable to a major shift (in favor of the producers), and they took advantage of that.
I would frame it slightly differently: people (and by extension, these companies) have always been greedy, so what is the new variable that actually enabled them to convert this greed into higher prices?
Blackrock and Vanguard's customers (your 401k) own some part of everything. They just manage it.
Blackrock does vote its shares for you most of the time, which can be a big impact, but my understanding is the practical impact of this has mainly been that BlackRock tells companies to care about climate change more and then Republican attorneys general get mad at them for this and write threatening letters about it.
The cycle where CalPERS puts all their money into tech startups and makes Silicon Valley VCs rich is more interesting I think.
The article is not making claims of any conspiracy. The companies can act individually to exploit a situation. Corporate greed. You're missing the context of higher reported inflation being used as an excuse to increase prices beyond what was necessary.
I would say capitalism is a system which innately maximizes for greed. When the money supply expands, greedflation is outright expected - no collusion or conspiracy required.
We're heading into an election cycle - and the incumbent administration desperately needs people to believe the economy is A) Better than it really is and/or B) Evil, Greedy forces are out there thwarting their best efforts.
It's the same sort of misdirection we have in California with gas prices, etc...
Expect a lot more of this type of activist "journalism" in the near future.
I see a lot of ultra-dismissive comments like yours whenever this is posted, but it seems to me like putting "believes there are microchips in vaccines" and "believes corporations will try to raise prices when they think they can get away with it" in the same league is a conversational gambit so daring that I have to wonder what your motives are.
This has just as much explanatory power: They're able to charge higher prices because individuals are saving less than ever, believe that rising costs are due to inflation and not corporate greed, and don't perceive it as price gouging but rather as a consequence of the current situation in 2023, including the global pandemic and the war in Ukraine. Additionally, we're witnessing an unparalleled level of consolidation across various industries, significantly reducing competition compared to previous years.
We're not on target for deflation; American consumers love spending money and are currently doing it as hard as they can. We seem to, amazingly, be hitting the soft landing.
Some other countries are doing poorly at the moment, but that's always true.
If you want to see the money supply shrink more, I'm told a good way is better tax enforcement.
Counterpoint: during COVID, supply costs of all types -- labor, transportation, raw materials -- were far less predictable than ever before. Therefore, a "risk premium" was embedded into prices.
You're the CEO -- for the past 5 years, costs rose steadily 2-4% annually, and you raised prices 3% each year. Now Covid hits, everything is in chaos, you expect costs to rise somewhere between 5 and 15%. Of course, there is also the possibility that you won't be able to access one specific ingredient at all, or that one element will spike in price. Now -- as CEO, how much do you raise prices? Just the average between 5 and 15, or do you err on the side of safety and raise prices 15%, or even more?
a) what profit is "necessary"? a business's goal is to maximize profit.
b) risk premiums exist in every form of economics. it's why, typically, stocks return more than bonds over time, for example. Why would regulators be interested in auditing companies for acting rationally?
Necessary to cover increased costs and manage actual risk. Where there is a lack of competition or opportunity for collusion companies can and do exploit the situation rationally. Just because it is rational doesn't make it legal or ethical.
Why is this so difficult for you to understand? This is not complicated.
I am not dismissing the concept of a risk premium. I am saying they can exploit the concept of a risk premium to justify an excessive increase in prices, beyond what is reasonable. Companies can collude to set higher prices and blame inflation.
Antitrust laws and regulations exist for a reason. Companies have been cheating since the beginning of the history of companies.
> I am not dismissing the concept of a risk premium
You wrote:
disguised as a "risk premium"
Saying something is just a disguise for something else and, for additional emphasis, putting air quotes around it is an unmistakable dismissal of the concept. Hard to imagine how you could have been more clear.
Cool it with implying bad motives. It's against HN guidelines.
Of course corporations will try to raise prices when they think they can get away with it. The question is, why did they think they could get away with it? Or, put the other way, why didn't they think they could get away with it before?
I assert that what prevented them before was competition - if you raise your price, and the other vendor doesn't, you lose business. Well, what happened? Did that mechanism just take a holiday? Did competitors disappear? Or what? Why did companies think they could get away with it now, when they didn't think that before?
That's where all these "greed" explanations fall short. Of course companies are greedy. They were greedy five years ago, too. Why weren't they raising prices then?
The way I heard it, energy prices rose, some companies increased prices in anticipation of much higher costs, everyone followed suit, fearing the increased costs, and the prices all surged.
Don't fixate on the term 'greedflation,' as it's based on the widely accepted notion of corporate greed. The primary counterargument to greedflation is that companies have always been greedy; it's not a new phenomenon. The concept of greed is entrenched in capitalist economies. However, the theory is that demand should naturally regulate this greed—if a company becomes excessively greedy, they risk losing customers who may opt to spend less, save more, or patronize other businesses. Thus, there's an assumption that the system self-regulates, allowing only as much greed as the market can bear.
Microchips are actually a more defensible belief. I can deduce that inflation isn't caused by greed with an extremely basic knowledge of economics. Meanwhile, while it seems a priori extremely unlikely that Bill Gates has been spiking our vaccine supply, in order to actually disprove it, I'd need a microscope and some time.
> By your logic any price hike is to be accepted and not questioned because "basic economics"...
No it doesn't. But by your logic, surge pricing is theft.
I have no particular faith in people. I observe that there's all kinds of irrational, nonsense beliefs scorned by mainstream economists that are popular among certain groups. "Greedflation" is dumb economic populism, nothing else.
I feel like you're an LLM having a fit of hallucinations.
Like I said, in any social mileu there are insane things that are commonly believed. Providing evidence that people believe in "greedflation" doesn't contradict that at all.
You didn't read the article. Greedflation is a theory that some companies exploited inflation to create excessive profits, not that greed was the sole cause of inflation.
I mean if it helps them pretend that helicopter money can't possibly have any negative second order effects then they'll believe whatever you tell them.
> Inflation is a hardship, a short one in this instance
Excess inflation represents permanent hardship. Inflation is a growth rate -- if it is 2% every year, then spikes suddenly to 8% for a year, and goes right back to 2%, that excess 6% is permanently embedded in prices in all future years. (very simplified example, but the concept is valid)
No. Rising wages are often the cause of high inflation, but wages do not increase as a result of high inflation. The harm from high inflation can be measured as increases in alternative (non-earning) methods of accessing money -- low savings rates, high credit card balances (and delinquencies), high levels of borrowing from 401k's (or low contribution rates), tapping into home equity -- which is exactly what we are witnessing now, not coincidentally, right after the biggest inflation spike in decades.
I won't pretend to be an expert on the matter, but I'm not very convinced by your argument.
> [...] wages do not increase as a result of high inflation
Not in the short term, sure. But if the cause of the inflation isn't something permanent, labour is still (somewhat) subject to the same market equilibrium (in real terms) as it was before the inflation. There are some major caveats here (e.g. wage stickiness), but we're talking long-term.
> which is exactly what we are witnessing now
I don't disagree, but again this isn't long-term. I assume you wouldn't expect these effects to last for the rest of eternity (assuming inflation returned to 2% and stayed there)?
I'm not sure what market equilibrium you're referring to. If things always balanced out in the long-term, our economic situation would resemble the 1950's or 60's, where a single-income household could comfortably afford a suburban house and raise kids. Instead, we have people living under their parents' roof until 30 or longer, enormous college debt loads, majority of families relying on two incomes (and often, one or both parents moonlighting at a second job), housing costs taking a larger slice of total incomes than ever before, married couples refraining from having kids as an economic decision, more people than ever relying on some form of government subsidy. None of these factors would be growing if some long-term equilibrium existed, because at some point, we'd be reverting to the mean. Instead, society's lifestyles have slowly shifted in response to the fact that, over the long-term, producers have become increasingly effective at extracting a larger and larger share of consumers' incomes, and ultimately, realized and potential wealth.
But surely you'd agree that most of those things are ultimately caused by external factors, not just some sort of long-term build up from inflation over the years?
> society's lifestyles have slowly shifted in response to the fact that, over the long-term, producers have become increasingly effective at extracting a larger and larger share of consumers' incomes, and ultimately, realized and potential wealth.
It sounds like we basically agree (even if I'd describe it a bit differently)?
Edit: I guess what I'm trying to get at is that there are lots of different things that can cause inflation, and not all of them follow your example of "that excess 6% is permanently embedded in prices in all future years" in real terms.
by "producers", I am not referring to wage-earning employees, but (primarily) corporations and business owners.
> there are lots of different things that can cause inflation
yes, true. but you've offered no support for your original claim that "wages catch up," or that the negative effects of brief periods of excess inflation are not long-lasting.
Yes, that's how I interpreted it - no disagreement here.
> "wages catch up,"
I probably should have clarified my wording a bit. I think it's clear that _total_ nominal earnings will increase [1] (because where else will the extra 6% of revenue go?), so the only question is how well distributed those earnings will be. In the short term, perhaps pretty poorly. In the long term, maybe a bit better - but that's a much more complicated subject and beyond what my original comment was trying to imply.
I didn't intend to imply that there are _no_ lasting effects from excess inflation, though I can see how it'd come across that way.
[1] again, assuming the inflation was caused by increased demand, not a supply shock.
Even if wages did catch up, retired folks are permanently disadvantaged. There’s a reason why the Fed targets a low inflation rate by default than letting it float freely.
Agreed, but my comment was more specifically about inflation being "permanently embedded in prices".
Also, retirees with savings don't tend to have all of it in cash (I hope?), but even if they do, the higher cash rate will slightly offset some of those effects.
Well I can’t actually read the study behind their paywall but I can tell you unless these so-called “scientists” got companies to open their books, they don’t know shit. And are also if ignoring the fact that every product or service requires energy, and energy prices are on the rise.
> And are also if ignoring the fact that every product or service requires energy, and energy prices are on the rise
The study tackles this head on. It mentions that the rise in energy prices due to the invasion of Ukraine is one of the initial triggers of high inflation, but that market power held by some corporations in certain sectors, including energy, amplified the inflationary effects of these initial triggers. Resulting in price increases peaking higher and remaining more persistent than they would have been in a market with less corporate market power.
Basically, it says there shouldn't have been this much inflation, but it got amplified because of lack of competition, and of being able to justify price hikes due to customers expecting there to be inflation.
They talk about the energy sector specifically, and how their costs did not increase, but they found themselves in a position of market dominance, where they could raise prices above their increase in cost and get away with it.
WTI crude has fallen for 7 weeks straight. NatGas futures have been in an unbelievable steady state at around $2.50-2.75 after coming down from pandemic highs.
Inflation = prices going up. That's it's definition. "Prices aren't going up because of inflation" has got to be the dumbest talking point ever invented. Could there be a more transparent propaganda term than "greedflation"?
Terrible article, focused entirely on "bad" companies, and no words expended for the total disruption the lockdowns caused and bailouts that made such things not only possible, but inevitable.
You can't shutdown all production plus pump money into it at the same time, and not expect inflation.
I can think of scenarios that explain this without the explanation being "corporate greed". eg if you had cheap suppliers and expensive suppliers, then the cheap ones went out of business, the expensive ones' profit would rise without their actively doing anything.
That's what happened with eggs in the last year; the price went up because nearly all the suppliers' chickens caught bird flu and had to be culled. So the surviving ones made a lot of profit as a reward for still operating. But prices are back to normal now.
Easier than explaining this:
> Inflation is now beginning to regulate in most major economies and coming closer to most central banks’ targeted 2%. Some companies that previously passed rising costs on to customers to continue making a profit have now sought to repay them with price cuts.
Good thing those companies that were greedy in 2021 are apparently negative greedy in 2023. I guess greedflation is transitory.
You're both saying the same thing, which boils down to supply and demand.
Supply shocks (e.g., bird flu) result in price rises in the presence of relatively inelastic demand (e.g., consumer staples).
In economic terms, "get away with it" means "what the market will bear". Find me a company that doesn't try to charge as much as it thinks it can to optimize for total profit when you account for decreased sales due to higher prices than other sellers in the market.
That is not the same thing as "greedflation" (getawaywithitinflation?) so it also conflicts with the article. You seem to be suggesting more of a buyer side change in what prices they forgive.
Any explanation needs to show why it didn't happen from 1990-2021, did happen 2021-2022, and then partly undid itself. Certainly some room for psychological factors in 2020, but it's probably not the main reason.
Yes, the explanation is pretty simple, buyers assumed that it was due to the Pandemic and the War in Ukraine, and all the effects on supply chains and all that.
It's not even necessarily "they got greedier", even CEOs expected troubled times ahead, and rising costs, so they also increased their prices, but they did so preemptively, instead of as a reaction to actual rising costs. What happened then is that they raised prices higher than the costs ended up being, and they did not immediately correct this, until they started seeing buyers change their behavior where they now feel the pressure to lower prices again (in order to sell more).
What normally prevents this is competition, not regulation. Normally, if someone raises prices of something like eggs "too far", then people buy their competitor's eggs.
So "could get away with it" means that competition no longer prevented them from raising prices. So that brings you right back to the supplier thing, or something very much like it.
Well, it's not necessarily that people buy the eggs. I think in reality grocery stores act as a monopsonistic purchasing agent and handle suppliers for the people. That's that Walmart low price guarantee.
I do remember my local store sold out of regular eggs (since the alternative to a price hike is a shortage) and I had to buy a pack of extra fancy ones that were all different colors and tasted unusually rich because they were fed on caviar or something. I tried to make that purchase last longer on principle.
Plausible. For that to be the case, though, either consumer psychology changed, or consumers have more money than they did. I could buy Covid changing psychology ("I've been holed up for two years; I'm going to go have some fun!"), but if so, that should be a temporary effect.
Or, consumers have more money. That could come from dumping a bunch of money into the economy. (In fact, that was a goal of dumping money into the economy.)
Or consumers saving less is an option too. For example if they thought Big Ticket items like housing were increasingly Out Of Reach, they might be inclined to simply spend more of their money instead of putting it in savings
Prices coming down actually isn't the opposite of inflation - the ideal is that they stop changing, which is "disinflation".
Prices going down in a single sector is okay, especially a volatile market that's kind of used to it, but when it happens everywhere that's "deflation" and means you're in the middle of a serious economic crisis like 2008.
It's more nuanced given the greedflation theory I believe.
Traditionally, inflation is attributed to: increased production costs (like raw materials, labor, etc.), increased demand, and monetary factors.
Greedflation instead says some of it is also attributed to: firms with significant market power increasing prices more than would be necessary to cover their increased costs.
This kind of price increase is not driven by the usual market dynamics of supply and demand but rather by the strategic pricing decisions of dominant firms in less competitive markets. That means, as competition ramps up, or buyers start holding back expenses, prices will come down again, to what should have been the "real inflation" all along.
If there's expected inflation or deflation it's not too bad; purchases get pulled forward or delayed but people can still make plans for it.
Unexpected inflation makes people unhappy because they have to increase spending on essentials, but they usually survive, and it's good for debtors because they get nominal wage increases which make nominal debts easier to pay off.
But the opposite happens with unexpected deflation - it gets harder to pay off loans, which is bad if your business has loans and can kill it. So if a company got a profit hike, reinvested all of it, then had a deflation shock, they might go bankrupt.
This is okay if it only happens to a few companies, but greedflation relies on some companies being extra important to customers, so that seems extra disruptive if they fail.
Your thesis doesn't really make sense to me. You're assuming someone that is making outsized profit this year, somehow is gambling all of that profit and their existing money in some risky bet that depends on the continuation of greedflation, and if that stopped and their price gouging were forced to come back down to normal level, they'd lose their bet, and somehow that would be so catastrophic that the biggest most depended on juggernauts would collapse into bankruptcy causing a country wide recession?
