What is greedflation – and is it driving higher prices? by Ian Thomsen August 2, 2022 Share Mastodon Facebook LinkedIn Twitter Have the oil companies been price-gouging? High prices have helped drive the greedflation debate. AP Photo/Paul Sancya Is inflation being aided and abetted by price-gouging? The idea of exploiting inflation to create excessive profits has become known as greedflation—a concept that is typically polarizing. “It is a convenient political meme,” says William Dickens, university distinguished professor of economics and public policy at Northeastern. William Dickens, university distinguished professor of economics and public policy at Northeastern.Photo by Matthew Modoono/Northeastern University Inflation hit a 40-year high of 9.1% in June, and Dickens says the causes have little to do with greed. “It’s exactly what an economist would expect to happen when there are supply shortages: A small change in the quantity of goods reaching the market can lead to a big change in prices in the right environment,” says Dickens, a former Brookings Institution fellow and consultant to central banks around the world. Greedflation is fast becoming a partisan issue. Democrats are complaining about high profits by oil companies and other big corporations, while Republicans are pinning U.S. inflation on the current presidential administration. “On the Republican side, they’re trying to blame everything on [President Joe] Biden, which is frankly absurd—all you have to do is look around the world and see all sorts of places that are experiencing the same type of inflation that is sometimes even worse than ours,” Dickens says. “And the Democratic response is something that fits with the ideology of the left wing of the party, which is that this is all bad behavior by businesses.” In a conversation News@Northeastern, Dickens lays out the causes of inflation and why greed isn’t necessarily a driver of higher prices. His comments have been edited for brevity and clarity. Is greedflation driving higher prices? Maybe there’s some of that going on. But in general this is not some nefarious [plot where] all of a sudden people in business are trying to take advantage of consumers. What is a more reasonable explanation for inflation? For one thing, shipping containers and therefore imported goods are hard to come by—you’d expect that would mean that the prices of those goods would go up a lot, and that the profits of the companies selling those goods could go up a lot as a result. The profit spikes will tend to be biggest for firms that have pricing power because they don’t have a lot of really strong competition and face markets where small changes in the quantity of goods available produce large price changes. What do you make of the big profits that oil companies have been experiencing lately? I’m not somebody who models petroleum markets. But the New York Fed does. And if you look at their supply-and-demand analysis that they publish twice monthly, you’ll see that they don’t have any trouble explaining the price increases in terms of changes in expected supply and expected demand. That to me says that the oil companies are probably not price-gouging—that this is the normal result when you have a restriction in supply in an industry where the price responds a great deal to even small changes in the quantities being offered. The restriction in supply has been caused by the embargo many countries have placed on Russian oil in retaliation for its invasion of Ukraine. Are there cases of greedflation in the U.S. economy? I wouldn’t be surprised if there were some people out there who are using the excuse of inflation [to raise prices]. There’s a concept in economics called “customer markets.” It holds that firms don’t like to raise prices because consumers get mad, and so if they’re in a situation where they feel they can raise prices, they’ll take advantage of it if they’ve had increases that have accumulated over a long time and their profit margins have been eroded. Then they’ll use the excuse to make up for past cost increases and also sometimes for expected future cost increases as well. So the customer markets phenomena can lead to even bigger increases in prices than you might expect. And of course a lot of industries are dependent on energy prices for a large part of their costs—like agricultural markets. When their costs go up, the price is going to have to be reflected. And so we’re seeing prices going up in the food sector. Is there a way to mitigate rising prices? Price controls got a bad name from the problems they caused when they were last used in the 1970s, but they might be more appropriate in the current environment.In the early ‘70s the inflation problem was mainly the result of excess demand caused by the Vietnam deficits and [Fed chairman] Arthur Burns’ irresponsible monetary policies. To the extent the problem today is caused by firms with market power, price controls could increase the amount of the goods that are offered. When will inflation abate? We do expect that a lot of the supply shortages are going to go away. The New York Fed has an ongoing analysis of supply chain disruptions and we’re seeing those decline. If COVID-19 is passing and people are going back to restaurants and buying other services and entertainment, they’re not spending most of their money on manufactured goods. Then we would expect inflation to start coming down. I expected it to start coming down already. But the increases in food prices, the increases in energy costs, the increases in labor costs—all of those things are feeding through the system. And so I expect to see inflation remain high for at least several more months. For media inquiries, please contact firstname.lastname@example.org.