Indeed, no less a person than the Governor of the Bank of England has said there is no evidence for excessive profiteering by companies, but perhaps he has not looked very hard; mobile phone operators have long built in mid-contract inflation hikes to sneak in price rises in an industry where data only gets cheaper.
And in the past year, fast-moving consumer goods vendors such as Nestlé, Proctor & Gamble, PepsiCo, Colgate-Palmolive, Reckitt Benckiser and Unilever have regularly reported strong price increases.
The first rule of Greed Club is: you do not talk about Greed Club. The second rule of Greed Club is: you DO NOT talk about Greed Club.
How did the sharp rise in inflation it begin? Early in the pandemic, some firms found the bottlenecks gave them a temporary monopoly.
They used supply chain shocks to raise prices enough to enhance profit margins, amplifying the cost shocks.
For example, the chips shortage allowed car makers to focus on expensive, higher-margin models and raise prices without having to fear a loss in market share.
During 2020, Proctor & Gamble managed to increase profit margins above the pre-pandemic level and then keep them there.
Selling healthcare and hygiene goods that people depend on gave them space to raise prices. During Covid, people did not want to tarry in supermarkets. With one eye firmly on the exit, consumers paid less attention to prices so that they could get out faster.
However, the profit margin-led inflation of the past year exists because companies know customers are more willing to pay higher prices when price hikes are perceived as legitimate.
That’s why companies try to spin a story that, regrettably, their price increases are ‘fair’ because of higher labour costs, higher energy bills, higher transport bills, climate-induced shortages, etc.
Profit-led inflation requires customers to believe stories that are not true. Every time the media runs another cost-of-living crisis story it gives greater credence to the corporate spin. These reasons may sound fair but they can also disguise the deliberate expansion of profit margins.
Multinationals have been increasing their profits for decades, so what is different now?
True, such firms are price makers, but they only engage in price hikes if they expect their competitors to do the same.
This requires an implicit agreement which can be coordinated by supply bottlenecks and the sector-wide cost shocks listed above.
According to the chief economist at UBS, we would typically expect about 15 per cent of inflation to come from the expansion of profit margins. Today, that number is closer to 50 per cent. That is profit-led inflation. Company bosses have clearly not forgotten the first rule of Greed Club.
