Today, inflation is upending the U.S. economy and straining household budgets. In May 2022, the year-over-year increase in prices of goods reached 8.6%, hitting a 40-year high that’s made prices on most essentials difficult to shoulder. While a number of economic factors are leading to inflation – including everything from fuel price increases related to the Russian war in Ukraine to supply chain issues – many people wonder if greedflation is also to blame.
Just what is greedflation, and how is it potentially impacting the economy? Join us for a look into this economic concept and what you can do to weather it.
How Do Economists Define Greedflation?
Greedflation is a term that refers to companies increasing prices purely to drive up profit margins. It implies that greed is the underlying reason behind a rise in the cost of goods and services and suggests that the price increases aren’t justified by a legitimate need for a price increase, such as a rise in the cost of materials or labor. Essentially, a price increase qualifies as greedflation when greed is the sole reason for the rise. Otherwise, inflation is likely behind the increase.
In some cases, greedflation is more common among companies with near-monopolies in their industries. In those instances, customers have little choice but to pay the listed price for the good or service because the number of alternatives is limited.
When there isn’t a near-monopoly involved, that type of price increase is harder to pull off. Customers may simply start favoring offerings from a competitor because they can get the same item or service without paying the inflated cost.
The Effects of Greedflation
The impact of greedflation varies depending on the degree to which it occurs. If it’s happening on a limited scale or in a non-essential product or service category, it may have little broad impact. Consumers can simply opt to go without that particular item or service because it isn’t a necessity.
However, if greedflation happens on a wide scale, the impact is similar to traditional inflation. Consumers may not be able to avoid the higher prices because they genuinely need the affected products or services.
The same thing can be true if greedflation impacts an entire product or service category. For example, if the price of bread goes up across the board, consumers are stuck dealing with the higher price. While the impact isn’t as severe as greedflation occurring across a variety of products or services, it can still lead to financial trouble, depending on the items or services involved.
Is Greedflation the Same Thing as Price Gouging?
Greedflation and price gouging do have some elements in common, but they aren’t always interchangeable terms, depending on the context. Usually, price gouging happens when companies raise prices in response to unprecedented demand. They aim to take advantage of an acute situation, so they increase prices when consumers feel they have little choice but to buy a particular good or service immediately.
One prime example of price gouging is spiking fuel prices tied to unpredictable events, such as what happens during a natural disaster or what took place during the Colonial Pipeline hack. Fear about a lack of gasoline drove consumers to the pumps in record numbers, creating a landscape where gas station owners could take advantage of those buyers by unfairly increasing prices.
Greedflation does have similar drives; its price hikes aren’t tied to a legitimate need for a rise in the cost of a good or service. However, greedflation isn’t necessarily triggered by any event. A company may engage in it simply because it can, particularly if the business has a functional near-monopoly on a particular good or service. As a result, price gouging is often a form of greedflation, but not all greedflation is price gouging.
Is Greedflation Impacting the U.S. Economy Today?
In a broad sense, greedflation isn’t behind the high inflation rate we’re seeing today. Many price hikes are related to legitimate events. For example, paying workers higher wages in response to the Great Resignation and other workforce factors increases costs, which then trickle down as higher prices for consumers.
Similarly, supply chain issues impact companies’ bottom lines. If businesses have to pay more for materials or to transport materials and products, that often leads to higher prices for consumers. Ultimately, companies do aim to maintain profits, so anything that pushes their costs up – particularly over a long period – causes prices to shift upward.
However, that doesn’t mean greedflation isn’t happening at all. With inflation pushing prices up in many product and service categories, even companies that aren’t seeing increases in their costs may choose to ride the wave. They’re taking advantage of the economic climate and allowing the increases in their prices to simply seem like byproducts of the economy at large.
How to Weather Greedflation (and Inflation)
If your budget is tight, you’re working to manage debt or you’re having trouble making ends meet, the concept of greedflation can feel infuriating. While it’s wise to encourage change by voting with your dollars, learning how to budget for inflation is also essential.
One key step is to examine all your expenses and identify any areas where you can potentially cut back on spending. Usually, this means focusing on entertainment-related costs, which aren’t tied to daily living essentials.
If you’ve been accelerating your debt repayments, you may need to return to making lower or minimum payments. This can free up some money to help you cover your immediate living expenses. Consider the shift temporary; you can always return to a more aggressive repayment plan once the economy calms.
When food prices are spiking, you may need to rethink how you shop. Start by looking for sales at every grocer in your area. Then, calculate the price per unit – such as the price per ounce – and compare that to alternatives in the product category, such as store brands, to ensure you’re actually getting the best price.
Coupons and rebate apps can also reduce your price at checkout or give you cash back you can put toward future purchases. Buying non-perishables in bulk can also be a smart move, as long as you’re getting the best per-unit price.
If you find yourself in a financial situation you can’t budget your way out of, contact your creditors. They may have programs available that can temporarily reduce your payments or interest rates, such as forbearance.
Ultimately, scaling back is usually your best bet, as is shopping smartly for the items you genuinely need. That way, you can reduce the amount of money you have going out, making inflation easier to navigate.