"Greedflation" in the UK: Not Merely Political

Image Source: Real Simple

Inflation has always been a topic that inspires fervent debate, and recent discussions have added yet another layer to the conversation – the emergence of "greedflation." It is a term that has seeped into our economic and political discourse, insinuating that today's inflationary pressures are being driven by corporate opportunism, where businesses, sensing the public's acceptance of rising costs, inflate their prices.

This suggestion has been dismissed by some as political propaganda, stemming primarily from leftist circles. But if we put on the lens of Post-Keynesian Economics (PKE) and delve deeper, we discover that greedflation isn't just a catchy buzzword - instead, it may very well be an accurate depiction of the current economic dynamics, rooted in the distributional battles between different classes.

Mainstream economic theories have, for the longest time, held onto the belief that businesses, in their infinite wisdom, will always price their goods based on demand. When demand rises, prices go up. When demand falls, prices drop. It is a simplistic model, yet, as the narrative goes, a functional one.

But the recent behaviour of several large corporations throws this theory into question.

With major energy providers reporting huge profit increases amidst a pervasive cost of living crisis, one cannot help but wonder: are companies playing the system, taking advantage of the general public's inflation expectations?

Then there is the issue of wages. The UK's Office of National Statistics has placed a surprising figure in the spotlight: a 7.8% rise in wages (excluding bonuses) in July from the previous year, a record growth since data collection began in 2001. Notably, this growth was driven in part by National Health Service workers who, after strikes, managed to negotiate higher wages.

While at first glance this might seem a welcome anomaly, the implications are profound. On one hand, it showcases the power dynamics in the labour market, as workers flex their muscles to ensure they aren't left behind in this inflationary spiral. On the other hand, it poses a question: is this wage growth a manifestation of genuine economic demand or, as PKE suggests, a reflection of the tug-of-war happening between different economic classes?

PKE offers a fresh, albeit controversial, perspective on inflation. According to this school of thought, inflation is not just about supply and demand imbalances. Instead, it is about distributional conflicts between different socio-economic classes. This viewpoint challenges traditional economic paradigms by proposing that inflation can sometimes be a power play between capital (or firms) and labour (or workers). I am rather sympathetic to this viewpoint - especially now - however, I would like to introduce one big deviation. That is, rather than thinking of greedflation as a ‘power’ struggle between evil capitalists and poor workers, we should instead be thinking about information.

What I mean by this is that businesses respond to price signals much faster than workers. We know this empirically because it takes time before workers actually begin caring about their real wages due to them suffering from money illusion. Therefore, this distributional conflict is a product of businesses raising prices and then workers adapting their behaviour to this new information.

An eye-opening IMF report highlighted that nearly half of Europe's inflation increase over the past two years could be attributed to rising corporate profits. If true, this aligns perfectly with the PKE interpretation of inflation. As firms chase higher profits and workers push for increased wages, what we witness isn't just economics in action, but a battle for a larger piece of the economic pie.

The UK's current economic climate, peppered with a mix of wage growth, profit hikes, and inflationary pressures, seems to reflect this PKE narrative. Greedflation, then, is not merely a political buzzword but might be a true representation of economic dynamics.

What is clear is that inflation, as it stands today in the UK, is not just a number indicating price rises, but rather a barometer of who is benefiting and who is bearing the brunt of these price increases.

Does this mean we need to overhaul our economic models? Perhaps not immediately. But it does indicate the need for a more nuanced, multi-dimensional approach to understanding inflation. While proving the existence and implications of greedflation remains a challenge, it is essential to investigate this phenomenon rigorously.

In a time where political narratives often cloud economic realities, it is imperative to approach issues like greedflation with an open mind. We must move beyond simple explanations and entrenched biases to uncover the real stories behind economic trends.