'Greedflation' a Negative Trend in Global Economics

July 2023

That the rate of inflation in Indonesia and many countries around the world is too high is a given. What is not confirmed are inflation’s current root causes. Many economists say that while there are several causes, “greedflation” is not one of them. I beg to differ. 

The term "greedflation" refers to a price rise introduced by companies to take advantage of inflation and boost their profit margin, even if they do not need to. 

There is evidence to suggest that greedflation may be a real phenomenon. For example, a study by the U.S. Federal Trade Commission found that profit margins for some industries have increased significantly in recent years. Christine Lagarde, the president of the European Central Bank, has also considered greedflation as a possible cause of the region’s inflationary trend.

High profile examples of greedflation include a law firm that, according to a recent lawsuit from Elon Musk’s X Corp., overcharged Twitter when it collected $90 million for its services while “Fully aware that nobody with an economic interest in Twitter's financial well-being was minding the store … arranged to effectively line its pockets with funds from the company cash register … and obtain an improper bonus payment in violation of its fiduciary and ethical obligations to its client.”

The Audit Directory, a UK company that matches audit firms with clients, says that “A number of our clients approached us with concerns about the level of fee increases they are experiencing. With inflation running at around 10%, this might be the increase you'd expect.  But the experience of many businesses in the mid-tier is that increases are significantly in excess of this, even up to 40% although more typically 15-20%.”  

Because of its increasing occurence, the term greedflation is becoming recognized in mainstream economic discourse and is also often used in a political context. Politicians may use it to criticize businesses for raising prices, or to argue for government intervention to control prices. For example, UN Secretary General Antonio Guterres called out the "greed" of big oil and gas companies for making "outrageous" and “immoral’ profits. “I call on all governments to tax these excessive profits, and to use these funds to support the most vulnerable in these difficult times," Guterres told a press conference to mark the release of the third UN report on the global consequences of Russia's invasion of Ukraine.

While inflation refers to the sustained increase in the general price level of goods and services in an economy over time, greedflation is used to describe a situation where companies raise prices not because they need to, but because they can, and where excessive greed or profit-seeking behavior contributes to inflation. For example, if businesses or individuals aggressively raise prices to maximize their profits without corresponding increases in production costs or underlying demand, it leads to inflationary pressures. This is often done in times of high inflation, when consumers are more likely to accept higher prices.

Greedflation is different than price gauging. Price gauging is a more specific term that refers to the practice of charging excessive prices for goods or services during a time of emergency. Price gauging is illegal in many jurisdictions, and it is typically defined as charging more than a "fair and reasonable" price for goods or services. The key difference between greedflation and price gauging is that greedflation is not necessarily illegal. It is possible for companies to raise prices without breaking any laws, even if they are doing so because they are greedy.
 

There are a number of things that companies can do to avoid greedflation ruining their reputation, including:

• Be transparent about their pricing. Companies should be clear about how they set their prices, and what factors they take into account. This will help to build trust with consumers, and make it less likely that they will accuse the company of greed.
• Consider the impact of price increases on consumers. Companies should think about how price increases will affect their customers, and whether they are justified. For example, if a company is raising prices to cover increased costs, they should consider whether there are other ways to reduce costs, such as improving efficiency.
• Be mindful of their competitive landscape. Companies should be aware of the prices charged by their competitors, and make sure that their own prices are competitive. If they raise prices too high, they may lose customers to competitors.
• Avoid colluding with other companies to raise prices. This is illegal in many countries, and it could also damage the company's reputation.
• Be clear about your company's values. What do you stand for? What is your mission? Make sure that your pricing practices are aligned with your values.
• Listen to your customers. What are their concerns about price increases? How can you address those concerns?
• Be proactive. Don't wait for inflation to hit before you start taking steps to avoid greedflation. Start now by reviewing your pricing strategy and making sure that it is fair and transparent.
• In addition, companies can also take steps to improve their efficiency and reduce costs, which can help to keep prices down. This could involve things like investing in new technology, streamlining their operations, or negotiating better deals with suppliers.

By taking these steps, companies can avoid greedflation and build trust with consumers. This can help to protect their reputation and ensure long-term success.
 

**The writer is James Kallman is the CEO of Moores Rowland Indonesia