 "Inflation")
The term greedflation is often used to describe a scenario when inflation in an economy is driven by corporate greed to make profit rather than an increase in cost of production, demand or wages.
To understand greedflation it is important to know how inflation works.
In simple terms, Inflation or inflation rate is the rate at which general price levels of goods and services increase in an economy.
An economy may face inflation due to either an increase in prices due to a rise in input cost or due to a mismatch in demand and supply, that may or may not be triggered by a rise in wages or a general increase in demand.
However, there may be many external and internal factors like supply-chain disruptions due to international conflicts like the Russia-Ukraine war or a hike in crude oil prices by Opec+ that may lead to a rise in inflation.
To tackle the problem of inflation, the central banks raise interest rates to bring down the overall demand in the economy.
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For example, the Reserve Bank of India may raise the repo rate to make loans more expensive. If the Banks decide to pass on the rise in rates to borrowers then there will automatically be fewer takers for loans. This helps the central banks to stabilise demand in an economy.
An increase in demand may also lead to a price rise in the economy. Generally, the increase in demand is also linked to an increase in wages or purchasing power of people.
But in case of Greedflation there is no such increase in wages or input costs of production. Instead, it is a scenario when big corporations exploit already existing inflation by increasing the costs way beyond the actual rise in their input costs to maximise their profits margins. Thus, further fueling the inflation.
Why is it in the news?
In developed economies like the UK and US, there have been allegations that the rise in cost of living is actually fuelled by corporate greed for more profit rather than an actual increase in cost of production or demand or increase in interest rates.
It has been said that the companies are exploiting the already existing rise in inflation.
Recently, an International Monetary Fund (IMF) study titled ‘Euro Area Inflation after the Pandemic and Energy Shock: Import Prices, Profits and Wages,’ pointed to the contribution of import prices and domestic profits to the recent increase in euro area inflation.
" We document the importance of import prices and domestic profits as a counterpart to the recent increase in euro area inflation. Through a novel consumption deflator decomposition, we show that import prices account for 40 per cent of the average change in the consumption deflator over 2022Q1 – 2023Q1, while domestic profits account for 45 per cent." the IMF report said.
The study said that the increase in nominal profits was largest in sectors benefiting from increasing international commodity prices and those exposed to recent supply-demand mismatches
“While the results show that firms have passed on more than the nominal cost shock, and have fared relatively better than workers, the limited available data does not point to a widespread increase in markups,” the IMF study added.
