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GREEDFLATION
The biggest study of ‘greedflation’ yet looked at 1,300 corporations to find many of them were lying to you about inflation
As they rolled their eyes at the frustratingly familiar sight of price markups in grocery store aisles, shoppers in 2022 might have wondered whether corporations were doing everything they could to keep prices down as inflation hit generational highs. The answer now appears to be a resounding no.
A joint study by think tanks IPPR and Common Wealth found profiteering by some of the world’s biggest companies forced prices up significantly higher than costs during 2022.
Greedflation
Inflation soared across the globe last year, peaking near 11% in the eurozone and above 9% in the U.S.
The source of that high inflation has become a well-trodden line. Analysts have typically laid the blame on supply-chain bottlenecks created by excess demand during the COVID-19 pandemic and exacerbated by Russia’s invasion of Ukraine.
The war also increased energy prices, leading to further rises in inflation as suppliers factored in higher transport and running costs.
While this obviously contributed to rising prices, the report finds that company profits increased at a much faster rate than costs did, in a process often dubbed “greedflation.”
Profits for companies in some of the world’s largest economies rose by 30% between 2019 and 2022, significantly outpacing inflation, according to the group’s research of 1,350 firms across the U.S., the U.K., Europe, Brazil, and South Africa.
In the U.K., the research found that 90% of profit increases occurred among just 11% of publicly listed firms. Profiteering was more broad in the U.S., where a third of publicly listed firms were responsible for most of the increase in profits.
The biggest perpetrators were energy companies like Shell, Exxon Mobil, and Chevron, which were able to enjoy massive profits last year as demand moved away from Russian oil and gas.
Food producers including Kraft Heinz realized their own profit surges. The war in Ukraine rocked global grain supplies and fertilizer prices, significantly increasing the cost of food, which remains sticky.
The findings add to a growing body of research seeking to highlight the role of major businesses in forcing up inflation last year.
A June study by the International Monetary Fund (IMF) found that 45% of eurozone inflation in 2022 could be attributed to domestic profits. Companies in a position to benefit most from higher commodity prices and supply-demand mismatches raised their profits by the most, the study found.
CEOs of the world’s biggest companies consistently sounded the alarm on inflation as a significant barrier to growth. Many blamed rising input costs on their own price hikes. However, lots of those CEOs appear to have instead used the panic of rising costs to pump up their balance sheet.
In April, Société Générale economist Albert Edwards released a scathing note saying he hadn’t seen anything like the current levels of corporate greed in his four decades working in finance. He said companies were using the war in Ukraine as an excuse to hike prices in search of profits.
“The end of Greedflation must surely come. Otherwise, we may be looking at the end of capitalism,” Edwards wrote. “This is a big issue for policymakers that simply cannot be ignored any longer.”
Prices coming down
Inflation is now beginning to regulate in most major economies and coming closer to most central banks’ targeted 2%. Some companies that previously passed rising costs on to customers to continue making a profit have now sought to repay them with price cuts.
Last week, Ikea stores owner Ingka’s deputy CEO said the company would be spending $1.1 billion to absorb inflation and bring down the prices of goods in its stores.
“People have thin wallets, but they still have needs, dreams, and frustrations,” Juvencio Maeztu told Fortune.
In November, Walmart CEO Doug McMillon suggested the era of high inflation in the U.S. was over, and shoppers may soon begin to experience a contraction in prices—known as “deflation”—in company stores.
“Rockets and feathers” is economists’ name for how prices change in some less-than-competitive markets.
When companies’ input costs go up for some reason, the prices they charge their customers go up like a rocket.
When their input costs go back down, their prices fall, but ever so slowly, like a feather. The example most of us can relate to is the retail price of gasoline.
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At least in the feather scenario, retail prices do go down. What’s worse for consumers is when companies simply don’t cut their prices in response to lower costs, and enjoy higher profit margins as a result.
There are signs of that beginning to happen now in the U.S. market, at least in some segments.
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This week I interviewed Samuel Rines, an investment strategist at Corbu L.L.C. in Houston. Rines said he coined the term “price over volume” in June 2022 to describe how companies were fighting higher costs at the time.
Revenue equals price times volume, of course. If a company could manage to raise its price by a big percentage and have its volume go down by only a small percentage, it would increase its revenue, offsetting its higher costs.
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Some people called that profiteering or greedflation, but to Rines it was just good business.
“If you’re profit-maximizing you’re going to do that and you should do that,” he told me.
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Profit margins grew, as an article in The Times this year showed. Now, though, he said, they could grow even more. He’s coined another term: “price and margin.”
Some key input costs have fallen, and customers aren’t agitating for lower prices because they’ve become inured to paying more. “The next year is going to be a completely different level. The interaction of price increases and input cost deflation is powerful,” he wrote in a follow-up email.
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True, a business could try to grab market share by slashing prices, but few chief executives are willing to play that game. “Businesses will be much more resistant to lowering their prices based on two to three months of declining costs” because they think the decline might be temporary, Rines said. “They’re afraid they’re going to get whiplashed.”
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In a note to clients on Tuesday, Rines pointed to Sherwin-Williams Inc., the Cleveland-based paint manufacturer, as the latest example.
In its quarterly earnings report on Tuesday, Sherwin-Williams said that “income before income taxes increased primarily due to selling price increases in all segments and higher sales volume in the Paint Stores Group, as well as moderating raw material costs.”
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Isabella Weber, an economist at the University of Massachusetts Amherst, told me she agreed with Rines.
Up to now, she said, some companies managed to amplify their profits through price increases, but “the dominant tendency was protection, not amplification.”
Now, she said, amplification could become the order of the day.
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That will be easier for companies if their costs of raw materials continue to decline. An index of commodity prices, the S&P GSCI, is down 28 percent from its high in June 2022 but still 37 percent above its prepandemic level of March 2020.
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Consumers complained about price increases during the pandemic but bought stuff anyway for the most part. Some clearly believed, and said, that companies were ripping them off but may have felt they had no choice but to pay up.
Others may have assumed that the price increases were justified by supply chain disruptions and the like.
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Whether companies can earn wider profit margins now that costs are easing will depend in part on whether consumers will start to rebel.
A YouGov poll of 1,000 Americans in June found that 61 percent blamed “large corporations seeking maximum profits” for inflation “a lot,” more than they blamed any other factor, including the pandemic, the war in Ukraine, foreign oil, federal spending and union wage demands. That was up from 52 percent who said “a lot” last October.
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My guess: Many companies will manage to widen their profit margins, although probably not as much as they’d like or for as long as they’d wish.
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