Over the past several years, the economy has experienced unprecedented shifts driven by the pandemic, stimulus packages, and changing consumer behaviors. In July, inflation began to cool meaningfully after record increases during the previous two years. This year, the Consumer Price Index climbed 3 percent through June and less than 4 percent through May, after peaking at roughly 9 percent throughout the entire previous year in 2022. Unemployment remains historically low at 3.6 percent, due to robust hiring. Nonetheless, consumers continue to spend at a solid clip.
There’s a lot to be said about living through a period with the highest inflation in four decades—and more than anything, it has been an ideal experimental setup for economists. While supply- and demand-related drivers frame the typical discussion of inflation, another idea that has gained attention is “greedflation.” Kogod finance professor David Stillerman offered his take on this phenomenon.
“Inflation has been driven by both supply- and demand-side factors. During the pandemic, plant closures, supply-chain issues, and changes in labor-force participation put upward pressure on costs (and, therefore, prices),” Stillerman says. “This inflationary pressure was sustained or exacerbated by changes in demand for goods and services due to changing consumer preferences and pandemic-related fiscal policy. As supply chain issues resolve and the impact of interest rate hikes is felt, it is natural for inflation to decline.”
Here’s how greedflation works:
Inflation first rose because of factors like the pandemic and economic stimulus bills. But companies raised prices more than necessary to net higher profits because consumers no longer had a benchmark for what prices should be. When all prices are rising, consumers lose the sense of “reasonable” prices, creating room for companies to redefine that range. Dismissing greedflation as a “conspiracy theory” obscures the intricate relationships that characterize it.
Greedflation could reflect corporate leverage and, in that sense, be more of a visible thumb on the scales if we believe corporations are supercharging inflation by increasing prices or not lowering them even as inflation declines.
The greedflation argument is that higher firm markups (i.e., the ratio of price to marginal cost) have led to a rise in prices.
“As someone who studies industrial organization, I take very seriously the idea that much of the time, markets are not perfectly competitive and that firms exercise their market power, raising prices and restricting output."