Inflation makes companies earn more and more. Why? Because they can! Foreign media call this phenomenon “greedflation.” Companies raise their prices because they know that, as consumers, we do not consider the costs. So why not get even more out of our wallets? The public administration is trying to control it, but it may not be able to cope with unprecedented levels of corporate greed.
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The Rise of Greedflation: How Business Margins are Contributing to Inflation
In the American media, more materials deal with a new, alarming economic phenomenon: greedflation (from greed and inflation). It begs the question: who is to blame? And the answer is business because it is about the company’s profits, i.e., their margins.
For the first time, the media noticed this phenomenon more than a year ago during a discussion about energy companies’ gigantic and unexpected profits during the post-pandemic period. The discussion arose when the earnings of these companies reported at the end of the year broke all records again.
GDP Deflator Income Side
Many companies are increasing their profit margins without significantly losing market share. This is made possible by the high prices of production costs. Why? Because consumers are not able to check whether higher prices are caused by higher costs or higher margins. High inflation is an ideal opportunity to recover lost income.
Egg Supplier: 800% Increased Profit per Year
Let me describe a good greedflacion example of a food company from the USA. Company X is one of the largest American suppliers of table eggs, controlling 1/5 of the market in the United States. In February 2023, the price of a dozen eggs from this producer was about $3. The year before (February 2022), it was $1.5, which means that the price of eggs increased by 100% during the year.
However, this is more than compared to the profit, because it turns out that the profit jumped by almost 800% during the year. This means company X earned eight times more than before during the year. Why?
Because the world markets ran out of eggs, the chicken plague has fallen globally, and their numbers have fallen globally due to avian flu. However, company X did not lose a single chicken from its flock. It did not find any illness and was not subject to sanitary rigors. Due to the astronomical increase in egg prices in world markets, Company X sold its eggs at twice the price.
The Truth About Greedflation: FT Report Sheds Light on Mechanisms Used by Companies
That is why the Financial Times is warning CEOs of companies operating in consumer markets to beware, as politicians, economists, and the public are increasingly skeptical about the legitimacy of price increases. Huge profits and ever-increasing margins do not go unnoticed despite a series of crises: from the COVID pandemic through broken supply chains and soaring energy prices to the war in Ukraine. However, the business, especially the largest one, was earning more and more then. How is this possible?
- The companies first passed on the cost increase to customers but soon realized that they could go further and had … inflation as an excuse.
- Entrepreneurs referred to the increase in production costs, transport costs, including sea freight, more and more expensive raw materials and production materials, the need to invest in new technologies, and finally, the need to raise wages caused by inflation.
But other mechanisms have enabled companies to raise prices systematically. Consumers bear part of the responsibility. But why?
Revenge Shopping Sweeps Prices Away After Lockdown
Locked in their homes during the pandemic and deprived of the possibility of spending cash, they gathered much of it. The pandemic, like a dam, piled up money in consumer wallets. Public authorities have also done their part. Wanting to save frozen economies, politicians and central banks handed hundreds of billions of dollars to people and companies. When the dam let go, a wave of cash flooded the market and swept prices away. Consumers went on revenge shopping to compensate for two years of consumer fasting. And since the most important thing in a carnival is fun, its price becomes secondary. Besides, business and production made goods for sale, so the balance was disturbed.
British Companies Reach Unprecedented Levels of Profit After Pandemic
An analysis of British stock market reports shows that British companies last year, compared to 2021, almost doubled their net profit. Reportedly, the data comes from continental Europe. The richest man in the world is currently Bernard Arnault, the owner of luxury fashion brands such as Chanel and Luis Vuitton. The value of his companies increased rapidly after the pandemic, surpassing the value of tech companies in dynamics. In the first half of last year, the profits of luxury companies grew at a rate of 30% annually.
California and New York to Implement Price Caps to Combat Unfair Price Increases
And what about public administration? Increasingly, state and regional authorities are trying to control unjustified price increases, especially in the case of primary goods. For example, California took to regulating gasoline prices and announced the introduction of a daily price register, which is expected to come into force in June 2023. There will be penalties for manipulating prices.
Companies with a dominant position in the market and the New York state authorities, who want to control price increases above 10% per year, have similar ideas. These separate regulations will apply to companies with dynamic price lists, depending on the time of day and the number of willing customers. This includes, for example, bicycle rentals or cinemas. A special mechanism will be created for them to determine the average weekly price, and the company that exceeds it will have to explain itself.
Greedflation on the Rise: Investors Warn
Albert Edwards, the chief analyst of the Société Générale bank, recently prepared the investors’ analysis*. According to this analysis, corporate greed is expected to be unprecedented. In the US, raising prices for profit in 2021 fueled inflation the most in history. Margins were close to all-time highs last year as the economy slowed and consumers became poorer. That is why the Société Générale warns against the fatal effects of greedflation. According to the institution, it must be ended as soon as possible. Otherwise, the entire capitalist system as such may be at risk.