Ever since inflation started ripping higher as the Covid-19 pandemic ended, there has been concern that companies were raising prices by more than necessary to take advantage of the new inflationary environment. If it were ever true, this holiday shopping season should put it to the test.
The phenomenon was called greedflation, and it seemed to be supported by rising profit margins last year as inflation rates increased to the fastest in a generation.
It was an attractive explanation for the rapid price gains, particularly from those who failed to see the inflation coming, but it was always controversial. For one, raising prices when an economic upswing is starting is a natural thing to do. Second, even if companies were raising prices faster than their own costs, the motivation could have been fear rather than greed. The worry was that their own input costs would keep rising in the future.
Inflationary spells are characterized by everyone trying to get ahead of everyone else when it comes to charging more. As economist Paul Krugman puts it, inflation is like the crowd at a sports event standing up to get a better view. But when everybody is standing, the view is worse for many and doesn’t get better until everyone sits down again.
In September, Federal Reserve economist Berardino Palazzo published a paper on whether greedflation was a real thing. He came to the conclusion that any increase in profit margins among nonfinancial corporations compared with past episodes could be explained by high levels of government support and lower interest rates.
This holiday season, consumers may still have money to spend and unemployment is low. What’s more, any Black Friday savings might not look that impressive after two years of rapid inflation—people still remember how much cheaper things were just a short time ago.
So if there was ever a time for companies to try greedflation, now might be the chance. But retailers have been cautious in their outlooks, noting that sales won’t be as impressive this year as they have during the postpandemic splurge.
Macy’s
(ticker: M),
Walmart
(WMT), and
Target
(TGT) all tried to temper expectations.
Things have settled down now. Headline inflation is back to around 3% and still slowing. If greedflation ever existed, it’s probably a thing of the past.
Write to Brian Swint at brian.swint@barrons.com
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