The Greedflation Hypothesis—are corporations price gouging struggling Americans?

This year inflation in the US reached the highest rate in 40 years. Are corporations using the cover of inflation to increase prices and make windfall profits on the backs of struggling Americans? Why does whether this hypothesis is true or not matter so much in the current political landscape?

What is Inflation and Greedflation?

Inflation is a measure of how much the price of goods and services has increased over a period of time. Consequently, it means each dollar is able to buy less, and thus is worth less. A simple maxim by economist Milton Friedman states that “Inflation is caused by too much money chasing after too few goods.” However, some—including President Biden and Federal Reserve chair Jerome Powell—have suggested that price gouging by corporations is a significant contributor to the current inflation. This hypothesis has been dubbed greedflation.

The argument of greedflation is not that corporations suddenly became greedy, but rather that they have been presented with an opportunity and have used the cover of inflation to increase their prices beyond what would be needed to cover their rising expenses, thereby boosting their own profits and driving extra inflation (higher prices) for everyone else.

Other factors that may have contributed to inflation are the Fed and US government’s monetary policy—under both Presidents Trump and Biden (there was a 33% increase in the money supply in 2020 alone)—and the supply chain crisis from pandemic shutdowns. These potential drivers of inflation will be covered in-depth in our upcoming article on inflation more broadly.

Record High Corporate Profits

Source: Bloomberg

Some of the strongest evidence of greedflation is the record high corporate profit margins in 2021, as seen in the graph below. Note that since this is shown as a percentage, it shouldn’t just be higher because more money was created by the Fed.

In fact, a breakdown by the Economic Policy Institute (EPI)—a left-leaning nonprofit that conducts research and analysis on the economic status of working America—suggests that corporate profits make up 53.9% of the recent price increases. Representative Katie Porter presented this data to congress, which you can see here:

Here is the EPI bar graph Porter presented:

And, for context, this is a line graph of the data that was used to create that same EPI bar graph:

However, there are a number of problems with EPI’s analysis. First, notice the significant drops in non-labor costs (cyan) in the bar graph and largest rise in the whole graph for compensation of employees (red) between Q1 and Q2 of 202 in the line graph. The EPI’s calculations for the recent contributions to growth in unit prices begins at the point marked by a thin, red, vertical line in Q2 after the sharp change between Q1 and Q2. The EPI calculations are expressed as large percentages but we’re talking about very small changes of less than 0.1 dollars, so disregarding the relatively large change between Q1 and Q2 has a large impact on the percent calculations.

Second, note that it’s always difficult to draw meaningful conclusions about people’s intentions and motivations from data that aggregates so many different industries. Consumer price increases are not the same across different sectors, and we would need to take into account all the factors that could play a role in the drastic changes that happened since 2020 Q1.

Third, many people weren’t allowed to come in to work or lost their jobs over the course of 2020, which could have resulted in less money being spent on wages. There were silicon chip shortages, and many stores were forced to close, especially local businesses and small mom-and-pop shops, while many large corporations were able to stay open or re-open sooner. Businesses were given many special tax breaks during the pandemic, some of which are still ongoing, and the EPI graph makes their calculations using data for corporate profits before taxes.

Even though the EPI graph doesn’t provide useful data for all the reasons mentioned above, that doesn’t necessarily mean corporate price gouging isn’t happening. It just means that it is not accurate to draw the conclusion that increases in corporate profit margins due to price gouging account for 53.9% of inflation. Let’s take a look at the other evidence we have that corporate price gouging is contributing to inflation.

Earnings Calls Talking About Pricing

Another argument for greedflation are the anecdotal accounts from some shareholder meetings that many interpret as high-level execs bragging about price gouging. Additional context from these earnings calls provides some more qualitative insight into the role of prices, inflation, and taxes on profit margins.

For example, in the Tyson Foods Inc 2021 Q4 earnings call they explain that, “Sales improved 20% in the fourth quarter and 11% during the full year. Our sales gains were largely driven by higher average sales prices. Average sales price trends reflect successful pricing strategies during the ongoing inflationary environment,” and say, “Like many other companies, we were faced with a range of higher levels of inflation, notably higher grains, labor, meat and transportation cost.” They talk about inflation more, saying, “In parallel to our actions to improve volume, we have also worked to recover inflation through pricing, achieving a 13% price improvement for the fiscal year and a 24% increase for the fourth quarter. In this dynamic environment, we will be aggressive in monitoring inflation and driving price recovery activities.”

In 3M’s 2021 Q4 earnings call they report, “Organic growth company wide was 1% on top of 6% in last year’s Q4, with earnings of $2.31 per share driven by a good December, strong execution, and a lower-than-anticipated tax rate. I am pleased with how we effectively managed production operations to meet customer demand despite ongoing logistics and raw material challenges that are impacting many companies. While focusing on customers, we also saw good benefits from our actions to drive productivity, improve yields and control costs, which helped offset the margin impact of supply chain disruptions, inflation and COVID-19. In addition, our selling price actions continued to gain traction with a year-on-year increase of 2.6% in Q4 versus 1.4% in Q3.”

3M sells healthcare equipment, among other things, and notes, “Our revenue in the quarter finished better than we expected across all businesses, including an increase in respirator demand due to the impact from the Omicron variant.” They state that “In dollar terms, higher year-on-year selling prices offset raw material and logistics cost inflation in Q4, which resulted in an increase in earnings of $0.03.” They note the impact of taxes, “a lower tax rate versus last year provided a $0.12 benefit to earnings per share.”

They also discuss this interesting breakdown of some factors that M3 says is accelerating inflationary pressures.

The macro-environment in 2021 was defined by strong but fluid end markets, semiconductor constraints, supply chain and logistics challenges, along with ever-evolving impacts from COVID-19, particularly on the global healthcare industry. These dynamics were further compounded by winter storm Uri in mid-February, which led to significant disruptions to raw material supply and logistics availability, which further disrupted global supply chains. All of these factors collectively helped contribute to broad-based and accelerating inflationary pressures throughout the year.

Meanwhile the CEO of Colgate-Palmolive explains in their 2021 Q3 earnings call about the “very difficult operating environment.” They talk about limited consumer mobility and temporary closure of manufacturing facilities “due to government restrictions to stop the spread of COVID-19.” They say that:

[T]he stress on global logistics networks is creating shortages of raw materials, lengthening shipment times, increasing costs, and adding additional uncertainty. All of this is on top of the significant increases in raw material costs and continued movement in foreign exchange.

Also, “Raw materials continued to increase in Q3, putting further pressure on our gross margins, despite additional pricing and productivity efforts. Our gross margin was down 180 basis points in the quarter.”

And, “Given the continued pressures from raw materials, we are projecting a greater decline in gross margin than when we last gave guidance in July.”

Additionally, they say, “We are focused on recouping the gross margin we have lost due to cost inflation over time, and are planning to take the actions necessary to do so.”

Finally, “Whether it’s foreign exchange inflation or raw and packing material inflation, we have found ways over time to recover that in our margin line.”

Making Up For Lost Profits?

Some economists think that the current high rate of profitability may be to offset lower profits from when much of the economy was shut down for the Covid-19 pandemic. 

We see in the Federal Reserve Economic Data graph below that the dip in nonfinancial corporate profits in 2020 had a steeper drop with a faster recovery than the one following the 2008 recession. Note that because this graph shows profits as millions of dollars per year, rather than a percentage, the creation of new money being injected into the economy would potentially be reflected by some rise in the graph. Therefore, we can’t determine from this data set the degree to which the rise in profits after 2020 is due to more money being available in the economy vs. corporations overcharging.

Source: FRED

There could be corporations taking advantage of the current inflationary situation, or trying to make up for losses during hard times, or both. Even if the latter is true, corporate recovery coming at the cost of consumer recovery just transfers harm from corporations to consumers.

Chicken or Egg?

A Digital.com survey conducted in November 2021 found that out of 1,000 retail businesses of various sizes 56% reported raising prices beyond what was required to offset higher costs. More than half also responded that they expect higher profits as a result. However, this may not be the best way to gauge whether price gouging is occurring or whether businesses are just trying to keep up with inflation. Since inflation means each dollar of profit is worth less, businesses would expect higher gross profits just to maintain profit margins.

We can see this concept play out in the steep drop of the inflation-adjusted real average earnings of private sector employees despite the usual annual pay raises and accounting for the decrease in the average workweek. The percent change in real hourly earnings dropped sharply as each dollar people earned was worth less and the percent change was still negative as of January 2022.

Because there is more money available in the economy, businesses would need to raise prices to keep up with it, since each dollar is worth less. They would also need to increase their employees’ compensation because each dollar they’re earning would be able to buy less, however it looks as though corporations overall aren’t increasing their workers’ compensation sufficiently to keep up with inflation.

Perhaps Things Are Not What They Seem

A statistical analysis published by Liberty Street Economics found that the change in gross profits of 22 out of 36 industries examined was actually negative, and concluded that profits are falling overall, and it’s just companies in higher inflation industries where profits are falling less quickly. They explain why one can’t assume that because the company’s profits are higher that that means they are price gouging.

It is worth noting that while inflation has risen sharply in the US, it has risen even faster in many other countries. This would seem to imply that whatever the causes of inflation, it is an international issue affecting many countries rather than something that is only happening in the US. That said, the causes and contributing factors could be different in different places.

Significance and Solutions

Overall, there is disagreement about whether price gouging is occurring and the degree to which it may be contributing to rising prices. If it is a significant contributing factor, some solutions that have been proposed include windfall profit taxes on excess corporate profits—which President Biden has proposed as recently as October 31—and government-mandated strategic price controls

It could be that corporations are using the current inflationary climate to raise prices more than necessary and not pass on the earnings to their employees. It is evident that wages are not keeping up with inflation. This is likely in the hopes that inflation will go back down, as raising wages could lock in the current inflation long term.

It could also be that the 33% increase in the money supply in 2020 that was used to fund the COVID stimulus packages and the shutdowns of shipping, production, and businesses around the world had some part to play.

Understanding the reasons behind the current inflation is important for determining where to place responsibility, how to fix it, and how to prevent such high inflation in the future.


Be sure to subscribe and stay tuned for our upcoming article that goes into more depth about the various causes of inflation.

Editors: Craig Carroll, Claudia Fox Reppen
Peer Review Completed By 4 Individuals
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By Stacia Wilson

Founder, Editor-in-Chief

Stacia Wilson is a writer and entrepreneur. She grew up traveling between the US and Japan as the child of Christian missionaries, and has been to over 20 countries as a digital nomad. To empower others to travel, she wrote the ebook How to Travel Without Time or Money.

Stacia’s background as a partner dance instructor and world traveler has given her a unique perspective on human connection, language, and culture. She has a wide-ranging skillset that allowed her to freelance remotely before becoming an entrepreneur. She has managed teams while working as editor-in-chief of multiple commercial blogs, such as Wandering Westie, a lifestyle brand, and SwayD, a dance shoe brand.

She has a BS in Anthropology from the University of La Verne (magna cum laude) and is a member of the Lambda Alpha National Anthropology Honor Society. As part of receiving her degree, she conducted multiple hands-on ethnographic studies. These included on-the-ground networking, interviews, and documentation of cultural events. Her senior thesis was an ethnography which involved conducting and analyzing research in Europe, Asia, and across the United States.

  Stacia has completed personal development and leadership programs with Landmark Worldwide, Powerteam International, and Mindvalley. Her last entrepreneurial endeavor before Covid was an online dance training program (in Japanese) for women in Japan. Most recently, she was a volunteer for Unity2020, a movement designed to encourage solutions-oriented perspectives and uncover options beyond the two-party political system that dominates American media and politics.

  Stacia founded 2ndLook News from a desire to reimagine news—from a system of misaligned incentives producing skewed information which results in division and chaos, to one that facilitates sound decision-making and common understanding.

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