In a recent article published on Fortune, global strategist Albert Edwards from Société Générale highlights the growing issue of corporate greedflation, a phenomenon where corporations take advantage of rising raw material costs to inflate prices and expand profit margins. Citing a study from the Federal Reserve Bank of Kansas City, Edwards contends that “markup growth” was the key driver of inflation in 2021, surpassing its historical significance in economic history. He warns that this unsustainable trend could lead to a loss of faith in capitalism.
The Unprecedented Rise of Corporate “Greedflation”
Albert Edwards characterises the current economic cycle as exhibiting “unprecedented and astonishing levels of corporate greedflation.” In this context, “greedflation” refers to companies exploiting the opportunity of increasing raw material costs to justify raising prices, even when the hikes are not proportionate to the actual cost increases. This strategy ultimately results in a widening of profit margins for corporations at the expense of consumers.
The concept of “greedflation” is not new and can be observed in various industries. For example, the tech industry has seen instances of companies raising prices for their products without any significant changes to the features or quality, simply because they are market leaders and can afford to do so. It is the consumers who bear the burden of these price hikes, while the corporations continue to rake in profits.
Markup Growth as the Primary Driver of Inflation
Markup growth refers to the increase in the difference between the cost of production and the final selling price of a product. According to a study conducted by the Federal Reserve Bank of Kansas City, markup growth has been the most significant factor driving inflation in 2021. This contradicts the commonly held belief that inflation is primarily caused by higher commodity prices or wage growth. The study suggests that businesses are increasing their profit margins by raising prices even when their production costs have not increased proportionally, leading to an overall increase in the cost of goods and services. This conclusion challenges the commonly held belief that higher commodity prices or wage growth are the primary forces behind inflationary pressures.
The Unsustainability of this Trend and its Impact on Capitalism
Edwards emphasises that this trend of corporate “greedflation” is unsustainable, as it could lead to a loss of faith in capitalism. No bad thing! The growing gap between corporate profits and the financial strain experienced by consumers may result in widespread disillusionment with the capitalist system, sparking calls for reforms or more drastic changes.
Edwards’ warning of “greedflation” is not unfounded. In recent years, the top 1% of earners (looking at you billionaires) have been accumulating wealth at an unprecedented rate, while the income of the bottom 50% has stagnated or even declined. Many argue that this income inequality is a direct result of corporate greed, with companies prioritising their profits over the well-being of their workers and customers. This trend is particularly evident in industries such as healthcare and pharmaceuticals, where the cost of life-saving drugs and treatments has skyrocketed, leaving many unable to afford the care they need. As a result, there is growing discontent among the working and middle classes, who feel that the system is rigged against them. If left unchecked, this could lead to a widespread loss of faith in capitalism and calls for a more equitable economic system.
Wider Concerns Among Economists
It is important to note that Albert Edwards is not alone in expressing concern about this trend. Other economists have also warned that corporate greed is playing a significant role in driving inflation, further exacerbating the burden on consumers. This growing consensus among experts underscores the urgency of addressing this issue.
In the United Kingdom, the price of fuel has increased by almost 50% (June 2022) in the past year. This is due to a number of factors, including the war in Ukraine and supply chain disruptions. However, some analysts believe that oil companies are also taking advantage of the situation to raise prices.
For example, Shell, one of the largest oil company in the world reported a profit of $20.6 billion in the last quarter of 2022. This is 25% more than the company’s profit in the same quarter of 2021. Shell CEO Ben Van Beurden has defended the company’s high profits, saying “At the same time, there is a responsibility with making money, and that is that we continue to invest in energy security, and we do, and in the energy transition.”
However, some critics argue that Shell is simply price gouging consumers. In return Shell would point out that the company’s profit margins may be at record highs, however they are not passing on the full cost of rising oil prices to consumers.
This is just one example of how corporate greed is playing a significant role in driving inflation. There are many other examples, such as the rising prices of food, housing, and heating. As these prices continue to rise, it is putting a strain on household budgets and making it difficult for people to make ends meet.
Potential Government Intervention
As concern over corporate “greedflation” mounts, governments may be prompted to take action to combat this trend. Governments can take several steps to combat corporate “greedflation”. One of the potential steps is to introduce regulations to limit price gouging. This can discourage companies from overpricing their products and services. Another step is implementing stricter antitrust policies. This can prevent companies from dominating the market and abusing their power to drive up prices. Governments can also encourage increased competition in various industries. This can result in lower prices and quality products as companies compete customers. However, the effectiveness of these measures may vary depending on the specific circumstances and the industry in question.
Shell, mentioned earlier, paid just £134 million in UK corporation tax in 2022, despite making a profit of $40 billion. This is because Shell is able to reduce its tax bill by investing in new oil and gas production in the North Sea. The Conservative government (reluctantly) introduced a windfall tax on energy companies in May 2022, in an attempt to raise money to help people with the rising cost of living. However, the windfall tax does not apply to companies that invest in new oil and gas production (which makes a mockery of the net zero target). As a result, Shell was able to reduce its tax bill by £500 million.
The low tax payment by Shell has been criticised by politicians and campaigners. They argue that Shell is making a profit at the expense of consumers, and that the company should be paying more tax. The government has defended the windfall tax, saying that it is fair and that it will raise £5 billion to help people with the rising cost of living. However, it is clear that the windfall tax is not having the desired effect. Shell is still making a profit, and consumers are still paying high prices for energy.
Addressing the Future of Capitalism and Corporate Greedflation
The rise of corporate “greedflation”, as highlighted by Albert Edwards, presents a significant challenge to the sustainability of capitalism. The disproportionate focus on expanding profit margins at the expense of consumers threatens to erode public trust in the system, potentially leading to calls for reform or more radical changes. As an increasing number of economists echo Edwards’ concerns about this trend, the question remains whether governments will take decisive action to confront the issue and permanently eliminate this harmful ideology or continue to uphold the principles of capitalism.
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