SINGAPORE: In a startling revelation, financial analyst Albert Edwards of Societe Generale has sparked a debate that could redefine economic landscapes: the potential end of capitalism.

According to Yahoo Finance, Edwards coined the term “greedflation” to describe the persistent rise in consumer inflation, and recent studies suggest that corporate profits are at the heart of this economic phenomenon.

What is Greedflation?

After a brief slowdown in 2022, consumer inflation has become a stubborn companion, hovering around the 3% mark. This unexpected surge, even as wholesaler prices remain steady or decline, hints at the presence of greedflation – a clear indication that companies are taking more than their fair share of profits above the raw cost of goods.

According to a recent study by the Groundwork Collaborative, more than half of the consumer price increases in the middle of last year were attributed to excessive profits.

The report delves into Commerce Department data, revealing that corporate profits were responsible for a staggering 53% of inflation during the second and third quarters of 2023 and over one-third since the start of the pandemic.

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Greedflation, aka “passing it on”

Liz Pancotti, a strategic advisor at Groundwork and one of the report’s authors, told Fortune:

“Businesses were really, really quick, when input costs went up, to pass that on to consumers. [But] had they only passed on those increases, inflation would have been maybe one to three points lower.”

Bloomberg Opinion columnist Justin Fox points out a potential downside to soaring corporate profits. He notes that companies like Home Depot may find themselves in a precarious position, with increased profits but declining transaction volume.

This high-profit, lower-volume dynamic affects workers experiencing reduced shifts and lower consumer demand due to rising prices.

Conor Sen, a Bloomberg Opinion writer, suggests that while a short-term positive outcome may be a four-day workweek, companies will likely resist relinquishing their hefty profit margins in the long run.

The tech industry is already witnessing this trend, with companies like Google and Amazon shedding less profitable sectors of their workforce in favour of more lucrative ventures like AI.

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Consumer-facing companies have been transparent about their price-raising strategies, with many expressing little interest in reversing course.

PepsiCo’s CFO, Hugh Johnston, indicated the company’s intention to increase margins, while others like Holcim and Procter & Gamble boasted about profit increases.

Groundwork argues that corporate profits are inflating consumer inflation rates. According to Pancotti, if corporate profits were excluded, inflation could have already met the Federal Reserve’s 2% target instead of lingering around the 3% range.

The Federal Reserve Bank of Kansas City echoes these findings, stating that corporate profits played an outsized role in consumer price inflation. This sentiment is supported by a recent review from the Institute for Public Policy Research and Common Wealth, which concluded that a small set of companies significantly drove up consumer prices.

Edwards’ warning about corporate greed potentially leading to social unrest resonates in this context. While classical economists argue that profit-seeking is inherent to businesses, mainstream and progressive economists increasingly believe prices do not need to escalate to such levels.

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Internationally, some corporations and governments are pushing back against price hikes.

Carrefour, a European supermarket chain, publicly highlighted price increases on PepsiCo products, leading to a decision to stop carrying them altogether. Similarly, Colruyt, a Belgian chain, dropped products from Mondelez due to price hikes.

Greedflation in Singapore

When GST increased by one per cent last Jan 1, 2024, prices also increased. However, one notable increase is from a featured eatery menu, with food prices up by 20% and some even by 25%.

Gladly, this was rebutted by Senior Minister of State for Finance Chee Hong Tat, who stated that merchants with such pricing hikes should be investigated and that the government will “take action against any errant businesses seeking to profiteer from the GST increase.”

As debates surrounding greedflation intensify, the economic landscape remains uncertain, raising questions about the sustainability of current profit-driven models and the potential need for regulatory intervention to ensure fair market practices. /TISG