On September 20, 2024, the term "greedflation" has emerged as a popular explanation among some politicians for rising inflation. This narrative suggests that corporations are raising prices under the guise of inflation to increase their profits.
Legislation based on this premise was introduced earlier this year and received strong support from Democratic senators including Jacky Rosen (D-NV), Sherrod Brown (D-OH), Tammy Baldwin (D-WI), and Bob Casey (D-PA). According to Casey's website, "Under the guise of inflation, corporations are raising prices on American families and raking in record profits to boot. From July 2020 through July 2022, inflation rose by 14 percent while corporate profits rose by more than 74 percent — nearly five times the rate of inflation."
These senators have endorsed the Biden administration's significant spending policies and appear keen to deflect blame for rising inflation. Economists widely understand that government spending beyond tax revenue often leads to price inflation through money creation or debt accumulation. Debt must eventually be repaid with interest, either through taxes or further money creation.
The principle behind this is straightforward: as more money is created, each dollar loses value. This concept aligns with the law of diminishing marginal utility in economics—more abundant items hold less value per unit.
However, attributing rising prices solely to corporate greed presents challenges. Greed is a constant aspect of human nature; it does not fluctuate in a way that would explain changing prices. The theory implies businesses have suddenly become greedier or were previously more generous when prices were lower—a notion difficult to substantiate.
Objective data also contradicts the "greedflation" theory. Kurt Couchman, an economic policy expert at AFP, reported that corporate profits have remained stable at approximately 10% of gross domestic product over the past decade. Casey's claims required selective data manipulation and omitted critical factors such as capital consumption and inventory valuation changes.
Harvard University economist Alberto Cavallo recently addressed this issue on X (formerly Twitter). He stated: "Total markups faced by consumers (retail prices relative to production costs) were stable during the recent inflation surge. Contrary to claims of ‘greedflation,’ we do not see any discrete change in total markups, suggesting that the increase in retail prices for these goods mostly reflects increases in manufacturing costs."
Cavallo's findings indicate that retail price increases correspond with rising production costs rather than increased profit margins for retailers.
For those interested in understanding more about factors contributing to declining dollar value, additional information can be found at https://www.greedflation.com.
