Does greedflation exist?

Across the world, inflation has remained stubbornly high. It is falling but not quite as fast as many governments and central banks would like. Policymakers are grappling with reasons why inflation has been slow to fall despite higher and higher interest rates as part of contractionary monetary policy. 

There are reasons why inflation has been slow to fall. There are time lags in the application of monetary policy because it takes time for firms and households to reduce spending as borrowing costs increase. For example, borrowers are often locked into fixed-interest rate borrowing deals on their mortgages so it takes time before they are exposed to higher rates. These time lags mean inflation does not react quickly to tightening monetary policy.

Inflation may also be staying stubbornly high because some cost-push pressures are still quite strong. So whilst energy costs have fallen back in the last 6 months food and housing inflation has remained high. 

One aspect of inflation as not been particularly well covered in the media that could explain inflation stickiness is so-called 'greedinflation'. This is where businesses use inflation as cover for profit increasing price rises. For example, the price of olive oil has increased by about 30 per cent in the last year and consumers in an inflationary environment are accepting of this, but the cost of producing olive oil has only increased by about 20 per cent. Olive oil producers and retailers will have increased their profits because of this. 

Another example is the market for petrol. The price of oil has fallen from by around 50 per cent in the last 12 months but petrol prices in many countries have only fallen by 30 per cent. By reducing their prices more slowly than when they increased them petrol retailers are able to increase their profits.  

On top of this, an inflationary economic environment gives many firms the opportunity to increase their prices even if their costs are not changing that much. Because buyers are generally more accepting of price increases in an inflationary environment, businesses in many sectors can raise prices and increase their profits. 

But as some businesses are able to profit from inflation, other firms experience falling profits and even bankruptcy. Firms in the hospitality sector such as restaurants, bars and coffee shops face rising rents, wages and material costs but are unable to increase their prices because of the luxury good nature of their service and the price elastic nature of demand for the goods they sell. If the costs of these businesses rise faster than the price increase they can charge then this will lead to falling profits.

The rising profits achieved by some sectors when there is inflation and falling profits in others is an example of the way inflation can redistribute income in the economy.

Possible questions to discuss with a class

1. How important is the elasticity of demand for a firm’s product in determining whether it can increase its price in an inflationary economic environment? 
2. Are profit-maximising firms doing anything wrong if they try to increase their profits when there is inflation?
3. Should government intervene in markets where businesses are profiting from inflation?
4. Discuss what 'greedflation' says about business ethics.