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What is ‘greed’ and is it driving prices higher?

Are price hikes aiding and abetting inflation?

The idea of ​​using inflation to create excessive profits is called greed—a typically polarizing concept.

“It’s a convenient political calculation,” says William Dickens, University Distinguished Professor of Economics and Public Policy at Northeastern.

Man with white hair and goatee posing outside
William Dickens, University Distinguished Professor of Economics and Public Policy at Northeastern.
Photo by Matthew Moduno/Northeastern University

Inflation hit a 40-year high of 9.1% in June, and Dickens says the reasons have little to do with greed.

“Exactly what economists expect to happen when there is a supply shortage: A small change in the quantity of goods reaching the market can lead to a large change in prices in the right environment,” says Dickens, a former Brookings Institution fellow. Adviser to central banks around the world.

Greed is quickly becoming a partisan issue. Democrats are complaining about high profits from oil companies and other big corporations, while Republicans are pinning US inflation on the current presidential administration.

“On the Republican side, they’re trying to blame everything [President Joe] Biden, this is clearly absurd—all you have to do is look around the world and see all kinds of places that are experiencing the same kind of inflation that’s sometimes worse than ours,” says Dickens. “And the Democratic response is something that fits the left-wing ideology of the party, which is that it’s bad behavior by businesses.”

In an interview with [email protected], Dickens explains the causes of inflation and that greed does not lead to high prices. His comments have been edited for brevity and clarity.

Is greed driving higher prices?

Maybe some of that is going on. But in general it is not harmful at all [plot where] Suddenly people in business are trying to take advantage of consumers.

What is the most reasonable explanation for inflation?

For one thing, shipping containers—and therefore imported goods—are hard to come by—which means you can expect the prices of those goods to go up a lot, and the profits of the companies selling those goods to go up a lot. Consequently.

Profit spikes are larger for firms with pricing power because they do not have truly strong competition and face markets where small changes in the quantity of goods available can cause large price changes.

What do you make of the huge profits oil companies have been enjoying lately?

I am not a petroleum market maker. But the New York Fed does. And if you look at his supply and demand analysis, which he publishes twice monthly, you’ll see that he has no trouble explaining price increases in terms of changes in expected supply and expected demand. That tells me the oil companies probably aren’t raising prices – that’s a common result when you’re constrained in supply in an industry where prices overreact to even small changes in the quantity supplied. The supply constraint is caused by the embargo on Russian oil imposed by many countries in retaliation for the invasion of Ukraine.

Are there cases of greed in the US economy?

I wouldn’t be surprised if there are some out there who are using the inflation excuse [to raise prices].

In economics there is a concept called “consumer markets”. Firms don’t like to raise prices because consumers get mad, and so if they are in a situation where they feel they can raise prices, they will take advantage of that if they have accumulated increases. For too long and their profit margins have eroded. They then use excuses for past cost increases and sometimes even expected future cost increases.

So consumer market phenomena can drive prices higher than you expect.

And of course a lot of industries depend on energy prices for a large part of their costs – like agricultural markets. As their costs increase, the price should reflect that. So we are seeing prices going up in the food sector.

Is there a way to mitigate rising prices?

Price controls got a bad name because of the problems they caused when they were last used in the 1970s, but they may be more appropriate in the current environment. The inflation problem of the early 70s was mainly the result of excess demand from Vietnam. Deficiencies and [Fed chairman] Arthur Burns’ Irresponsible Monetary Policies. Today’s problem stems from firms having market power, making price controls possible increase Amount of goods offered.

When will inflation come down?

We expect a lot of supply shortages to go away. The New York Fed has an ongoing analysis of supply chain disruptions and we are seeing that decline.

If COVID-19 is passing and people are returning to restaurants and buying other services and entertainment, they are not spending most of their money on manufactured goods. Then we expect inflation to start coming down.

I expected it to start dropping already. But increases in food prices, increases in energy costs, increases in labor costs — all of these are feeding through the system. So I expect inflation to remain high for at least a few months.

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