Now that last year’s epic spike in food and consumer goods prices appears to be behind us, there is renewed debate over who or what is to blame for today’s lingering inflation. Two principal theories have floated in and out of the headlines during the past two years. One is a myth masquerading as a conspiracy. The other was a prevailing economic “given”— until recently when some of the nation’s leading economists had to admit it was flat wrong.
The conspiracy is “greedflation,” loosely defined as price-gouging or monopolistic profiteering. Prices are so high; the theory goes, because retailers found they could jack them up with little consumer pushback by pointing to the headlines. Don’t blame us, they said. Blame gas prices, clogged ports, lousy weather, the war in Ukraine, rising wages, and the pandemic — and then watch the windfall profits pile up.
Rising prices were indeed driven by factors such as ocean freight costs, scarcity of commodities, and energy costs. The Federal Reserve’s Global Commodities Index tripled in just two years, setting a new all-time high. The price of the humble egg went from $1.33 to $4.82 a dozen.
But it’s also true that supply chains are flowing again, and commodity prices have substantially retreated. The inflation rate is less than half what it was a year ago, and consumers have gotten used to paying more. Eggs are still historically expensive, but compared with a year ago, they’re cheap at $2.67 a dozen.
Retail profit margins have widened, but a windfall has yet to materialize. The most recent quarter’s average earnings-per-share among the S&P 500 companies fell by 1.4%, although that was much better than the 6% decline analysts had been expecting.
In any event, greedflation suggests predatory pricing, but today’s better profit margins would be impossible without consumer assent. As Wall Street Journal columnist Jon Sindreu pointed out last month, “Profit margins need two to tango: Corporations have successfully increased prices only because … the rest of the economy has kept spending.”
Wage growth is the other principal villain widely accepted as a solid assumption. Between June 2021 and July 2022, workers discovered they could demand and get higher wages. The reasons included the flood of government stimulus money that encouraged many workers to stay home rather than return to work. There was also the phenomenon of the Great Resignation, aka the Big Quit. There were more jobs than people who wanted them, so employers had to pony up.
When inflation began to tick up, economists fretted that surging labor costs would force companies to raise prices which, in turn, would encourage workers to demand more to keep pace, and so on — a wage growth spiral.
Like so many statistics and data points that become accepted wisdom by repetition, a new analysis by Federal Reserve economist Adam Shapiro finds that wage inflation was not the boogie man at all. He discovered that it represented less than 5% of the rise in the Consumer Price Index. No less an authority than former Fed Chairman Ben Bernanke agrees in a recently published co-authored paper: “Tight labor markets alone made only a modest contribution to inflation early on.”
It’s worth noting that in the years leading up to the onset of the pandemic, the retail industry was muddling along, operating mostly on razor-thin margins. The pandemic helped flush out those companies that were weak or with bad strategies to begin with, like Bed Bath & Beyond, and inflation helped the survivors navigate a treacherous economy until things returned to normal.
To me, that sounds more like capitalism than greed.
