With inflation proving to be both higher and ‘stickier’ than many had anticipated, economic analysis has looked at a wider range of possible causes, in addition to the conventional explanations around money supply, wages, market forces and the economic cycle.
One point of discussion is whether opportunistic companies are passing on more than increased supply costs to customers, a dynamic that has been called ‘greedflation’. In the pure markets of economic theory, a company increasing its prices excessively would simply cause customers to move elsewhere, and competitors would be tempted to lower prices to attract them.
Arguably, ‘pure’ markets do not exist, but some are purer than others, so there is much to analyse and debate. The economist Isabella Weber, of the University of Massachusetts, has been prominent in arguing that ‘greedflation’, or ‘seller’s inflation’ has been significant, reporting that some companies pass on all the increased supply cost, and more, to customers, and sustain such an approach. Some firms may lose market share as a result, but the problem, Professor Weber argues, is that a ‘price over volume’ strategy can be profitable when there are overlapping supply shocks. Bottlenecks can produce temporary monopoly power, she says.
The International Monetary Fund has given some support to the theory, with the First Deputy Managing Director of the IMF Gita Gopinath stating in June 2023 that, if inflation is to fall quickly, companies should allow their profit margins to decline and absorb the rise in labour costs.
More conventional analyses of recent inflationary pressures, put forward for example in The Economist, emphasize the role of loose monetary policy, combined with supply shocks, such as that caused by the conflict in Ukraine. They downplay or dismiss seller’s inflation, describing instead a well observed phenomenon of too much money chasing too few goods, with both inflation and higher profit margins resulting from the fiscal stimuli of high public spending and low interest rates during Covid.
Although debate among some economists has been polarised, the two theories are not mutually exclusive. Inflation has multiple causes, and is a complex phenomenon. Ultra-low interest rates and supply shocks have certainly been influential factors. It is likely also that companies, at least for a period, may use rising costs as a ‘cover’ for boosting margins, but whether this is temporary and inevitable to prevent insolvency, or suspicious, may reflect the effectiveness of competition policy.
Outright price fixing, unlawful in many jurisdictions, can occur. There have been investigations in the food industry in the US, and some meat suppliers have agreed to settle lawsuits relating to price fixing.
Given that critics of the ‘sellers’ inflation’ theory tend to be free market economists, it shouldn’t be difficult to find a consensus around policy responses that boost competition. Higher interest rates have been only partially effective in curbing inflation. They can curb supply as well as demand, by adding to costs of some companies. So it is perfectly rational to explore complementary policies that may encourage downward pressure on prices.
Where blatant price fixing does not occur, but competition is weak, there are measures that governments and regulators can take. A small economy such as Qatar is more prone to problems of lack of competitiveness. There may be a single agent for a multinational company for example. In a sector dominated by one or two players, with high capital requirements and running costs, the barriers to entry are high for an aspiring disruptor, and too high in order to access a relatively small market. Higher interest rates can increase the cost of entry by making capital more expensive. A new entrant may have to endure trading at a loss for an extended period while building market share.
Many companies in the Middle East are private, so the public does not have access to data on profit margins. Regulators have more information, and so the onus falls on them to encourage stronger competition. They need to look at gross profit margin, not just net profits, because it has been known for companies to pay questionable ‘management fees’ to increase their apparent costs and reduce profit margins and tax. On the other hand, company executives may argue that healthy profit margins help investor returns, job security and potential for reinvestment, so the issue is complex.
Governments and competition regulators should be active on this issue, especially regarding prices of life’s essentials, such as fuel and food. Rigid price controls are unrealistic in a free market, but political and regulatory pressure can be brought to bear where margins look high and competition is limited. A favourable policy mix for start-up companies can boost competition.
So for all the debate about whether ‘greedflation’ exists, many policies that would curb or deter the practice would solve other problems, and should attract broad support.
The author is a Qatari banker, with many years of experience in the banking sector in senior positions.
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