Understanding 'Greedflation': Exploring The Phenomenon; Its Effects On Global, Indian Economies

The rising prices of essential kitchen staples, including tomatoes, in India have led to speculation about the presence of 'Greedflation.' Let us try to understand what it means and how it works

The sharp rise of inflation in India and other countries following the Covid-19 pandemic and the Ukraine war has sparked numerous theories and discussions regarding the underlying causes of this sustained price surge and the potential measures to address it. One of these theories revolves around the term called 'Greedflation'. It refers to a situation where excessive greed among individuals or corporations contributes to an increase in inflationary pressures within an economy.

Although the exact origin might be hard to locate, it has been continuously used by Western media. Now in India, the rising price of a few essential kitchen staples, including tomato, has raised the question if India is also amidst so-called 'Greedflation'. Let us try to decode. 

What Is Greedflation?

Greedflation is characterised by the notion that inflation is being driven by corporate greed, hence combining the two terms 'Inflation' and 'Greed'. To understand this further, let us take a look at how inflation works. Inflation is caused by two factors, cost-push and demand pull. Cost-push inflation happens when input costs rise, pushing up prices. Demand-pull inflation occurs when there is excess demand, leading to price increases.

Central banks raise interest rates to manage demand, prevent the Wage-Price Spiral, and control inflation. The governments use fiscal policy to reduce spending or increase taxes to control inflationary pressure. The Wage-Price Spiral occurs when rising prices lead to higher wages, driving further price increases. The central banks intervene to break this cycle and maintain price stability.

Now Greedflation occurs when rather than the traditional Wage-Price Spiral, it is the Profit-Price Spiral that gains momentum. The Profit-Price Spiral occurs when companies raise prices excessively to maximise their profit margins, contributing to inflation. In crises like natural disasters or pandemics, businesses may exploit the situation by significantly increasing prices for higher profits. 

Now, many economists and progressive commentators in the West have argued that during and after the pandemic corporates used the situation to raise the prices higher than they needed to gain profit.  

Economists' View On Greed-Led Inflation 

Some argue that the term 'Greedflation' is popularised by The New York Times in 2022, suggesting that corporate greed may be a contributing factor to recent inflation. While initially dismissed, the concept has gained some credibility with research indicating that monopolistic companies have benefited from inflation. 

In 2021, German Economist and UMass Amherst economics professor Isabella M. Weber in an article for The Guardian argued that  "sellers' inflation" (a term similar to Greedflation) driven by companies exploiting supply shocks and disruptions to raise prices is a significant factor in price rise. She proposed measures such as windfall profit taxes and the creation of "shock absorbers" to discourage price-gouging and mitigate the impact of systemic disruptions.

Although, Weber's idea was initially dismissed and she received backlash from the likes of Economist Paul Krugman. Later countries fighting 40-year high inflation used these measures to control the high profits of big corporates. According to Bloomberg, Europe is enacting price caps, the US Biden administration working to lower oil prices, and UK Prime Minister Rishi Sunak considering measures to control grocery prices. 

The discussion around 'Greedflation' has gained traction as policymakers seek to understand and address the persistence of inflation. Relying solely on interest rate hikes as a strategy to combat inflation, economists think could further constrain supply and hinder economic growth.

However, there is stiff opposition to the 'Greedflation' theory. The Wall Street Journal published an article arguing that greed is beneficial for the economy. Many other free markets economists and thinkers believe that the rise of Greedflation helps companies continue with excessive production and keeps the economy out of recession. The US's Minneapolis Fed president Neel Kashkari in a New York Magazine interview acknowledged this idea. According to him, the debate revolves around whether greed is driving inflation or if it is merely a political talking point. The question of whether higher profit margins will persist and their role in inflation remains unanswered.

Greedflation is also often compared to the "cost-push" theory of inflation, which attributes rising prices to increased input costs such as wages. However, in the case of Greedflation, the focus is on the corporate desire for higher profits as a driving force behind price increases. Critics argue that the cost-push theory overlooks the fact that the cost of production is ultimately determined by consumer demand. The cost of inputs, which have alternative uses in society, is determined through competitive market bidding.

Is India Facing GreedFlation?

According to a report recent by Motilal Oswal Financial Services, the corporate profit to GDP ratio for Nifty500 companies and listed firms in India showed a mild decline in 2023 due to increased commodity prices. The profit growth rate for Nifty500 companies also slowed down to 8.7 per cent in FY23 compared to last year, following significant increases in the previous two fiscal years.

However, despite the challenges posed by the pandemic and weak economic recovery, corporate profits showed a strong recovery during the period of 2020-2023. The report highlighted that the profit-to-GDP ratio improved for most sectors, with significant contributions from PSU banks, private banks, telecom, metals, insurance, and oil and gas. Only sectors like cement, media, and consumer durables witnessed a compression in the ratio.

"In 2023, the corporate profit to GDP ratio for the Nifty500 universe and listed India Inc. contracted marginally to 4.1 per cent and 4.3 per cent after rebounding in 2022 to reach a decade high of 4.3 per cent and 4.5 per cent, respectively. The YoY decline was led by global commodities, which contributed adversely to the ratio, while BFSI contributed positively," said Motilal Oswal.

This strong profit during the pandemic year does indicate the theory we have discussed. But only after a thorough study of net profits and what is causing higher profits, it can be said whether Greedflation is happening in India or not.

However, according to the Centre for Monitoring Indian Economy (CMIE) data, the net profits of listed companies are at a record high. Net profits of listed Indian companies, totaling 4,293, experienced a significant surge in March 2023, reaching Rs 2.9 trillion. This figure is more than three and a half times the pre-pandemic average of Rs 0.83 trillion recorded from December 2017 to December 2019. The substantial increase in net profits indicates exceptional profit generation in the post-pandemic period.

However, the recent rise in tomato prices in multiple cities within a month is not attributed to Greedflation but rather to adverse weather conditions and low tomato yields, as suggested by multiple economists and government officials as well.