Greedflation and its counter arguments: how consumers ultimately decide prices  Premium

Why greedflation is not a sound theory as corporates cannot make up prices for their products at will

Greedflation refers to price inflation caused by corporate greed for high profits. Progressives in the United States have accused corporate greed as a major reason for the historically high price inflation in the U.S. since the pandemic. The proponents of the idea of greedflation argue that corporate profit margins have risen significantly since the pandemic even though the larger economy has struggled and that this has contributed to high inflation. They contend that the U.S. corporations have allegedly increased the prices of their goods by more than what was necessary to compensate for higher input costs caused by supply-chain bottlenecks.

Proponents of the greedflation theory of inflation see this as a sign of increased market dominance by corporations, and have called for efforts to rein in market power of large corporations and some have even advocated for a ban on price hikes to prevent “profiteering”.

Many economists, however, have questioned the validity of the argument that corporate thirst for higher profits is the cause behind inflation. They see greedflation as a political narrative built around the issue of inflation rather than as a serious economic explanation of high inflation since the pandemic.

Economists who disagree with the greedflation narrative argue that businesses, whether they are large corporations or small companies, cannot arbitrarily set prices as many people seem to erroneously believe. Businesses set prices for their products based on what consumers would be willing to pay for these products. In other words, businesses cannot force consumers to pay a certain price for their goods; they can only try to gauge the maximum price that consumers would be willing to pay and set prices accordingly in order to maximise their profits. If a business sets the price of its product too high, this would cause its goods to go unsold and the business would have no choice but to lower the price of its product to clear its unsold stock.

In short, while businesses have the freedom to raise or lower the prices of their products, it is ultimately consumers who determine the price of any product in the market. So be the case, it may not be sound to argue that corporate greed is behind the rise in inflation.

Moreover, inflation refers to a general rise in the price level (meaning a widespread rise in the prices of goods and services across the broader economy) rather than in the prices of individual goods and services. The only way corporations can influence the overall price level is by reducing the supply of goods and services. There is, however, no evidence to suggest that there has been a deliberate reduction in the output of U.S. corporations recently. Even if corporations cut down their output, the drop in output is likely to be temporary as other suppliers would rush to meet the demand.

It is thus extremely unlikely that U.S. corporations caused prices to rise across the board in recent years by somehow adversely influencing the aggregate supply of goods.