Blame the skyrocketing inflation rate on Russia’s invasion of Ukraine. Blame it on supply chain problems. Blame it on the pandemic. Just don’t blame it on big businesses that are doing what they need to do to survive, Wharton marketing professor Z. John Zhang said.
He’s not buying the notion of “greedflation,” an argument being pushed by the White House and congressional Democrats that corporations are taking advantage of consumers through astronomical price hikes that rake in the cash while Americans struggle to pay for basic necessities. The Consumer Price Index rose to a 40-year high of 8.6% last month, with food, gasoline, and housing accounting for most of the increase.
“That’s a very cute term,” Zhang said about greedflation. “You probably want to ask the politicians or The New York Times” where it came from.
During an interview with Wharton Business Daily on SiriusXM (podcast above), the professor said corporations have become a convenient scapegoat for inflation. But they are responding appropriately to inflationary pressures that are beyond their control, including the war in Ukraine, rising oil prices, supply chain and logistics problems, and shifting consumption patterns during the COVID-19 pandemic. These factors combine to make “the perfect formula” for high inflation, he said. (Zhang recently published an op-ed in The Hill on this topic.)
“I think that firms are actually doing exactly what they’re supposed to do. Where you could raise prices, you raise prices to make more money to invest for more production. That’s what we want the firms to do,” Zhang said.
If there’s any truth to greedflation, he said, it’s that businesses are eager to pass along their increased costs to consumers because consumers are more receptive right now to price hikes. Companies don’t have to worry as much about being undercut by the competition if they raise prices. But that doesn’t mean that firms are manipulating the markets through collusion.
“I think that firms are actually doing exactly what they’re supposed to do.” — John Zhang
“Personally, I think that blaming companies is not going to go very far, and it’s not going to go on very long unless you can find some evidence for collusion,” Zhang said. “In this environment of inflation, you really don’t need to collude and raise your prices together.”
No Easy Answers
Urged by their cash-strapped constituents, Democrats are exploring remedies for inflation that include dropping Trump-era tariffs and suspending trade barriers. U.S. Sen. Bernie Sanders, D-Vermont, introduced a bill in March that would impose a 95% windfall tax on excess profits of big companies. But Zhang cautioned that any policy changes should not interfere with the free market.
“If you force firms to stay put with their prices, the next thing you’re going to notice is there are going to be shortages, and consumers will begin to hoard products,” he said. “When consumers begin to hoard products, you’re going to have even more shortages. So, that’s probably not the path that we want to take.”
Zhang also dismissed the idea that monopolies are amplifying inflation, especially in the oil and gas sector. Exxon Mobil, which President Joe Biden castigated during a press conference for making “more money than God this year,” lost $22 billion in 2020, the first year of the pandemic. A lot of other monopolies also lost money that year, which Zhang said is evidence that even behemoth corporations are susceptible to market forces.
“I really think this whole discussion about monopoly is a red herring. The reason is because before the pandemic, those monopolies were there,” Zhang said. “If you want to force Exxon Mobil to lower prices and cut into their profitability today, are you prepared to subsidize the company when the company is not doing well? If you’re ready to do that, then let’s just forget about the free market.”