Is greedflation really the villain?

The ongoing economic debate revolves around the cause of inflation - whether it's due to corporate greed or other economic forces like demand and supply. Traditional economists argue that inflation is not solely the result of corporate greed, while some unorthodox economists and commentators believe corporations are the main culprits. This debate is crucial as it suggests different ways for policymakers to address inflation. If it's corporate greed, price controls might be considered. However, if it's too much demand, raising interest rates could help curb consumer spending. An economist, Chris Conlon, ran the numbers on corporate greed and found mixed results. While he acknowledges that firms may engage in collusive practices, the evidence does not definitively support the idea that corporate greed is the primary cause of inflation. Ultimately, a balanced approach that considers various economic factors is necessary to effectively address inflation.

That there is little to no correlation between rising inflation and higher profit margins for corporations. Economist Chris Dissanayake and his co-authors, while investigating the cause of rising markups and inflation, analyzed the markups for over 6,000 publicly traded companies over several decades and found that there was no significant correlation between industries with the fastest price increases and larger estimated markups. Despite initial expectations, the data showed a near-perfect scatterplot with a correlation close to 0. This finding challenges the common belief that corporations are driving inflation through increased profit margins.

A study published in the American Economic Association's papers and proceedings last month found no significant correlation between inflation and corporate profits in the US economy, despite both experiencing increases in 2021. The researchers ran extensive analyses to rule out any potential errors or outliers, and found a correlation of 0.00, indicating an almost perfect lack of relationship between the two variables. However, there was a brief period of correlation in the middle of 2021 when profits and inflation both saw increases. But since then, profits have started to decline while inflation remains high, suggesting that the two phenomena may no longer be linked. The researchers noted that unexpected savings during the pandemic may have contributed to the windfall profits in 2021, but these gains have since dissipated. In summary, the study challenges the common assumption that rising corporate profits drive inflation, and highlights the importance of considering the complexities of economic data and trends.

During the lockdowns in 2020, savings rates increased significantly due to stimulus checks and extended unemployment. However, when things reopened in 2021, people spent their money on cars, renovations, and new appliances, leading to high demand and supply shortages. As a result, firms raised their prices to make profits before costs increased, initiating the inflation trend. In 2021, CEOs reported strong earnings, but by 2022 and 2023, profits began declining. It's important to note that earnings calls should be taken with a grain of salt as companies often use scripted language. In 2021, all companies seemed to give their "good quarter scripts," making every CEO appear successful. However, it's crucial for firms to react quickly to inflation trends and raise prices promptly to maintain profitability.

European Central Bank President Christine Lagarde's comment about some sectors pushing prices higher than just cost increases isn't surprising. Prices can go up more than costs due to increased demand, which affects consumers and businesses alike. While it may be tempting to blame external factors like cost increases for price hikes, it's essential to remember that demand plays a significant role. During the discussion, Chris Conlon emphasized that there's no theoretical or practical reason why prices should only rise in tandem with costs. This perspective challenges the notion that cost increases are the sole cause of price hikes. As consumers and businesses, we may not want to accept the responsibility for driving up prices, but it's crucial to acknowledge our role in the market dynamics. The conversation also touched on the potential consequences of higher interest rates, which could impact our ability to make significant purchases like mortgages and cars. The episode was produced by NPR, and the discussion was influenced by various sponsors, including Saatva and Fundrise.