So Is 'Greedflation' Actually Happening?

The IMF says corporate profits are driving inflation in Europe – but UK economists think pay rises for workers are the problem.
<strong>A man shops at a Tesco Extra supermarket in London.</strong>
A man shops at a Tesco Extra supermarket in London.
PAUL CHILDS via Reuters

One of the world’s most influential financial institutions has suggested corporate profits are now the biggest single cause of rising inflation in Europe – sparking a fierce debate over whether “greedflation” or “profiteering” is happening in the UK and it’s not, actually, rising pay for workers.

Here’s everything you need to know.

What is ‘greedflation’?

Last week, the Bank of England raised interest rates for the 13th month in a row after data showed the downward trajectory of inflation has stalled at 8.7%

The base rate hike to 5% – a 15-year high – will cause misery for homeowners who have to refinance their mortgages in the coming months, and raised fears that the British economy is heading for a recession.

Britain’s surge in inflation initially reflected a leap in energy costs after Russia’s invasion of Ukraine, compounding existing supply-chain bottlenecks created by the Covid-19 pandemic.

But those factors have now faded away significantly, and rises in food prices and wages are now said to be the driving forces behind inflation pressures.

And this where the discourse begins – is the problem workers demanding pay rises to keep up with the spiralling cost of living, or are companies profiteering? Excessive company profits is sometimes known as “greedflation”, and the idea is that firms have been exploiting the inflation crisis by lifting prices to boost profits.

While the phrase has become fashionable, pushed by trade unions and some politicians, the economic elite has largely dismissed its significance ... until an International Monetary Fund (IMF) analysis this week caught many people’s eye.

IMF puts blame for rise in prices on corporate greed

The IMF, the world’s lender of last resort, is hardly the scourge of Global PLC. It became infamous for demanding that struggling countries adopt austerity policies in return for loans during the last financial crisis.

But in a blog post describing a new research paper written by three staff economists, the IMF nails its colours to the mast: rising corporate profits were the largest contributor to Europe’s inflation over the past two years as companies increased prices by more than the spiking costs of imported energy, it says.

A graph that has gone viral on Twitter shows profits accounting for 45% of price rises since the start of 2022 – while labour costs accounted for 25% cent. The blog said: “Corporate profits now account for nearly half of all euro area inflation. In other words, Europe’s businesses have so far been shielded more than workers from the adverse cost shock.”

And it had a stark warning about what should happen: companies “may have to accept a smaller profit share if inflation is to remain on track”. The message was echoed by Gita Gopinath, the IMF’s deputy managing director at its annual conference in Portugal. She said: “If inflation is to fall quickly, firms must allow their profit margins—which have shot up during the past two years—to decline and absorb some of the expected rise in labour costs.”

So is it happening in the UK?

The UK has been more resistant to the “greedflation” narrative. Last month, the Bank of England said that there is little evidence so far that excessive company profits are to blame for high inflation, in contrast to concerns in the eurozone.

During the fourth quarter of last year, when inflation was highest, net rates of return outside the oil and gas sector were 9.6%, up from 8.9% in the third quarter but below their level of 10.9% three years earlier before the Covid-19 pandemic.

Krishan Shah, an economist at the Resolution Foundation, a think tank which focuses on issues affecting low-paid workers, said last month: “The big picture is that while greedflation has become today’s hot topic, it does not seem that firms are expanding profit margins and raising returns.”

Instead, the UK’s central bank thinks it’s actually workers wages doing the damage ...

What is a wage-price spiral?

Britain’s main focus has been the “wage-price spiral” – where companies hike prices and as a result workers demand pay rises, which leads to companies hiking prices again.

It stems from the 1970s, when the government used this phrase as a threat to suggest that raising salaries would only worsen the double-digit inflation. Bank of England governor Andrew Bailey is convinced this is the UK’s problem, saying after the interest rate lift last week that pay rises were “unsustainable”, adding: “We cannot continue to have the current level of wage increases.”

The key statistic: annual growth in wages excluding bonuses rose to 7.2% during the three months to April, official figures showed, up from 6.8% in the three months to March. Outside of the Covid-19 pandemic, when wage statistics were skewed by furlough schemes, it was the highest reading on record.

But this arguably rings hollow with workers who haven’t received anything like that – especially when even the average pay bump is far outstripped by the cost of basic goods and services. Britain had the highest rate of food price inflation in Western Europe during the 12 months to May at 18.7%, according to official data. Prices for milk, cheese and eggs are up 27.4% versus last year.

Supermarkets reject profiteering

British retailers dismiss suggestions of “greedflation”, or what is sometimes referred to as “price gouging”, and rejects the principle of price controls, which have been suggested by some as a way to keep inflation under control.

On Tuesday, executives from Tesco, Sainsbury’s, Asda and Morrisons, appearing in front of parliament’s business and trade committee, argued their profits fell last year.

“We make 4 pence in every pound which I don’t think is any example of profiteering,” Tesco commercial director Gordon Gafa said.

Rhian Bartlett, Sainsbury’s commercial director, said her firm made less than 3 pence in every pound customers’ spend, while Asda’s chief commercial director Kris Comerford said a 25% slump in 2022 profit wasn’t consistent with profiteering.

The British Retail Consortium, which represents the major supermarkets, has said there is usually a three to nine months lag for falls in wholesale prices to be reflected in retail prices, with the more complex the supply chain the longer the lag.

Separately on Tuesday, Bank of England policymaker Swati Dhingra said there was little evidence of companies failing to pass on lower producer prices so far.

“It’s not very convincing to argue – at least as of yet – that grocery inflation is driven by ‘greedflation’,” she said.

The supermarkets say they are passing on savings to customers as soon as they can and most have recently cut the prices of some staple products.

So what’s the government doing?

The concerns over profiteering are not going away. The PA News agency has reported chancellor Jeremy Hunt is to ask industry regulators what they are doing about any companies exploiting rampant inflation by raising prices.

The chancellor will reportedly meet the Competition and Markets Authority, and the watchdogs for energy, water and communications on Wednesday. He will press them on whether there is a profiteering problem in their sectors and what they are doing about it.

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