Chief Economist, U.S Chamber of Commerce
May 16, 2023
What’s happening: The idea that corporate greed, or “greedflation,” is the cause of persistent inflation is making the rounds again, so it’s worth reiterating the obvious: there is no such thing as “greedflation.”
The facts: Inflation is caused by clear and well-understood economic factors that stem from supply and demand. Prices rise when we have too many dollars chasing too few goods and services. There is nothing more complicated to the story than that.
During the pandemic, we had a limited supply of goods and services coupled with an increase in demand. Prices rose as a result, but that effect was short-lived. It faded once the economy began reopening.
The Fed’s role: The more long-lasting effect of inflation is the Federal Reserve’s (the Fed) expansion of the money supply. This expansion of the money supply was well above any increase in the size of the economy, hence too many dollars facing too few goods and services. The persistent inflation we are experiencing now is from that expansion. The slow reduction of inflation coincides with a declining money supply, which takes time to achieve.
This is not to criticize the Fed’s COVID-era monetary policy. It had to do what was necessary to stop a financial crisis while the world dealt with a pandemic. Unfortunately, the timing for unwinding those actions got away from the Fed for a variety of reasons, including how long the virus lingered and the size and timing of the fiscal response to COVID.
Business’ response: Businesses did not cause the reduction in supply, the increase in demand, or the growth of the money supply. They naturally reacted to the changes in market prices that resulted from those things.
Businesses have no choice but to raise prices when the costs of their inputs rise, which they have substantially, including their biggest expense – labor. If they don’t raise their prices to accommodate these changes, they would see their margins shrink and could ultimately start losing money. They raise prices to offset these effects that would otherwise jeopardize their businesses.
Assuming that inflation exists because businesses raise prices gets the causality exactly backwards. They raise prices when prices in general are rising.
Bottom Line: Despite the many articles decrying corporate greed, there is nothing more going on than the simple facts of the economy. Corporate greed is not the cause of inflation, and it is past time for the misleading narrative of “greedflation” to be put to rest for good.