High inflation is terrible as it exacerbates the cost of living crisis and hurts the very poorest the most. However, there is a lot of misleading stuff being peddled that it is the result of greedy corporations earning record high profits. For example, this from a BBC journalist saying that profits have increased in line with inflation (complete with graph). It’s not just journalists who are at it. I was watching a Treasury Select Committee session (because I’m cool) where Angela Eagle was grilling the witnesses about it.
In reality, greedflation is largely a myth.
First, it kind of makes no sense when you actually think about it. Firms obviously do care about making a profit but this is always true. They didn’t suddenly become incredibly greedy last year after years of being incredibly selfless and are now starting to once again be less greedy. That’s not how it works!
High inflation also works against the interests of firms. If things cost more then consumers are likely to buy less of the stuff or not buy it at all. Outside of cartels, firms don’t collude with each other to keep prices high. The opposite is true, firms compete with each other by keeping their prices low in order to attract consumers. In fact, supermarkets spend a lot of money on advertisements to brag about the fact that their prices are lower than their rivals.
There is also very little evidence of it. The chart shared by the BBC journalist is incredibly misleading as it only shows data in nominal terms and so it is not adjusted for inflation. New data released by the ONS today shows that firms are no more productive now then they were before the start of Covid.
The excellent IFS found pretty much the same thing with their analysis earlier in the year.
Inflation has been persistently high for a number of reasons. The headline rate (which includes food and energy) has been high due to Putin’s evil invasion of Ukraine. Other goods were also more expensive due to supply chains being disrupted during the pandemic. There was also a lot of increased demand in the economy which the Bank of England failed to deal with quickly enough. As I wrote yesterday, inflation is heading in the right direction. However, this is not due to businesses going full on Ebenezer Scrooge after a visit from some ghosts, they’re just as greedy as they have always been.
This is not to say that there is no evidence of firms making ‘excess profits’ (I really don’t like that term). The big energy companies have certainly done well in recent years. However, this is probably more down to being in the right industry, many of their rivals failing, and good luck rather than greed.
Also, this is not to say that more can’t be done. The Competition and Markets Authority (CMA) often makes some wrong calls and it would be helpful if they were to ensure that supermarkets did a better job at showing actual prices as opposed to the price with a loyalty card. As an aside, it should also follow the recommendations of this excellent paper by the Startup Coalition when it comes to technology firms.
I was encouraged by the CMA back in June as it clamped down on the use of restrictive covenants by supermarkets in stopping rivals from setting up shop near them. There is far too much of this going on. The road my mum lives on in Huddersfield has had a Sainsbury’s for many years (in a mini-shopping centre) which then campaigned to prevent the opening of an Aldi on the same road. You must understand that of course its primary concern was for the good people of Huddersfield and cited spurious concerns over increased traffic (this is on one of the main roads connecting Huddersfield to the motorway). Thankfully there was a rare win for YIMBYs against this dreadful rent-seeking and so there was a campaign by local residents (I am proud to say that my mum signed the petition) and the Aldi is now open and doing a roaring trade. There was also a campaign for Lidl to open as well which I believe has got given the green light.
In short, greedflation is a myth.
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Have a great weekend!
Ben