Of all the arguments surrounding inflation, the idea of “greedflation” is among the most disingenuous. In layman’s terms, greedflation supposedly occurs when producers engage in price gouging to get rich off the vulnerabilities of hardworking people.  

In this article, I will demonstrate how the theory of greedflation is built upon invalid assumptions about basic economic principles. Specifically, the crusaders of greedflation hold misinformed beliefs about the monetary system and competitive markets.

Producer and consumer prices

Supporters of the greedflation hypothesis believe greedy corporations are the culprits behind the 20.8% inflation rate from February 2020 through May 2024. They claim corporations seized the opportunities of COVID-19 and the conflict in Ukraine to hike their prices to earn excessive profits.

Researchers who advance greedflation as the lead cause of inflation point to the fact that input prices for some key goods have fallen since mid-2022 while consumer prices have continued to rise. This is technically true, but it is misleading.

Figure 1 shows the Producer Price Index (PPI) in blue, which measures the change in the prices of inputs purchased by producers. The Consumer Price Index is in red, which measures the change in the prices of products purchased by consumers.

What champions of greedflation fail to recognize is that although producer prices have slowly decreased over the last two years, their cumulative growth rate is still 9% higher than that of consumer prices since the onset of the pandemic. It is also worth noting that many of the products sold this year were created with inputs firms purchased in 2022 when the PPI was at an all-time high. This means that these products will be priced according to their higher production costs from 2022.

Money and inflation

Contrary to what the mainstream media espouses, greedy corporations, spurious pandemics, and foreign despots have no control over the long-run inflation rate. As Milton Friedman expressed, “Inflation is always and everywhere a monetary phenomenon.” This means long-run inflation is exclusively created by monetary policy, which in the United States is solely conducted by the Federal Reserve.

Stated simply, high rates of inflation occur when the government prints too much money. Creating trillions of dollars in a short period of time diminishes the value of existing dollars and creates a condition of vastly more dollars chasing the economy’s goods and services. The result is a sharp rise in prices.

For example, let’s assume in February 2020, you spent $200 each week on groceries. However, as depicted in Figure 2, the government inflated the money supply by 42.3% from February 2020 to April 2022. Consequently, each dollar bill you have is less valuable than before because now dollar bills are not as scarce. While the Federal Reserve created trillions in more dollars, it did not create any more groceries.

This means you will need more dollar bills to purchase the same groceries you could buy for $200 back in February 2020. That is how the Federal Reserve’s poor monetary policy is responsible for inflation.

Markets and markups

To assert that corporations are charging deplorably high prices, one must lack an understanding of the market forces of supply and demand. While the money supply largely determines the overall price level in the economy, the price of any specific good or service is determined by voluntary interactions between producers and consumers who engage in exchange for mutual benefit.

A firm’s “markup” refers to how much its product’s price exceeds its cost of production. The more competitive a market is, the smaller the markup will be due to each firm contesting to attract consumers. However, if a market lacks competition, firms can charge a higher markup. Firms in less competitive markets do not charge a higher markup than firms in more competitive markets because they are greedier. Regardless of the market, firms always try to sell their products at the highest prices possible. Consumer demand and the degree of competitiveness of the market, not the level of lust for profits, determines how high those prices will be relative to their costs of production.

In markets lacking competition, where firms can charge large markups to consumers, the solution is to facilitate increased market competition through decreasing government regulation. The more government regulation there is in a market, the more difficult it is for firms to enter and stay, which drives down the level of competition in the market and increases the size of the markup the remaining firms can charge.

Surprisingly, some supporters of the greedflation theory of inflation recommend more regulation and taxation as a solution to bring down inflation. Advocates claim that forcing corporations to pay higher taxes will incentivize those corporations to stop engaging in greedflation. This certainly romanticizes the role of government; however, it is poor economics. The idea that higher corporate income taxes will incentivize firms to decrease their prices is like saying that increasing personal income taxes will incentivize people to work the same job and hours for a reduced salary.

So, let’s be clear: if the most recent spell of inflation was incited by greed then it was not that of corporations; it was the greed of the government. Historically, government officials have always viewed crises as opportunities to expand their influence over society. With the onset of COVID-19, politicians leaped at the chance to increase federal government spending as a percentage of the economy to its largest share since World War II.

Policy recommendation

The state of North Carolina has zero influence over monetary policy. Devising state-level fiscal policies to solve macro-level monetary issues is not wise unless your objective is political rather than economic. Instead, the state should focus on what it can control and continue implementing policies that foster economic growth.

Policymakers should proceed with the plan to reduce the personal income tax rate to 2.49% by 2029 and eliminate the corporate income tax in 2030. Furthermore, the General Assembly should terminate the franchise tax, which has a disproportionate negative effect on small businesses and reduces market competition.  

Implementing policies that enhance economic freedom by allowing citizens to unleash their productive potential is the pathway to prosperity. Punishing those who are the most productive in society for failures that were manifested by government greed is not.