https://www.epi.org/blog/profits-and-price-inflation-are-indeed-linked/
From groceries to streaming platforms, consumers have witnessed a rise in prices almost everywhere. This was initially attributed to inflation, as the pandemic disrupted supply chains and significantly increased manufacturing and labor costs. However, as these pandemic disruptions eased, prices still remained high, creating an ongoing debate between economists, politicians, and business analysts: Were companies increasing their prices as a result of higher costs, or did they leverage inflation as an opportunity to expand their profits?
This phenomenon is often called “greedflation,” a term describing the expansion of corporate markups beyond what is required to cover input costs. According to the Economic Policy Institute, “rising profits explained well over 40% of the rise in the price level between the end of 2019 and mid-2022, compared with profits normally accounting for about 11-12% of prices.” This report suggests that companies showed strong profit margins due to inflation surges from the pandemic. In more concentrated industries with limited competition, businesses often have a stronger opportunity to increase prices due to limited alternatives available to consumers.
The central idea behind this is mostly based on pricing power, which means that a company can increase their prices without a risk of losing many of their consumers. Mostly, companies with a strong pricing power include well-known brands or companies with limited competition. During periods of elevated inflation, consumers may expect price increases and become less sensitive to them. Thus, consumers are more likely to accept these higher prices as a result of modern economic situations.
However, not all economists, politicians, and business analysts believe that companies are taking advantage of inflation to raise their prices. Other economists state that business costs will not immediately drop as inflation moderates. Oftentimes, companies agree on long-term contracts with their suppliers and employees, which still remain as a reason for modern higher prices despite our economy’s current situation. As a result, some companies do need to keep their prices high for a longer period of time in order to cover their expenses along with an appropriate profit margin. It may also be a firm strategy for the future. If inflation worsens and economic slowdown occurs, these current higher prices can help protect them from losing consumers from increasing their prices.
In the end, this question does not have a simple answer. Price increases are often necessary for some companies to meet the need for higher expense costs, while others may utilize it as a strategic way to gain more profit. Rather, this debate highlights the importance of market competition. When markets are very competitive, most companies do not have the freedom to increase their prices excessively, while companies within less competitive markets do. However, as inflation stabilizes, it will reveal how much influence companies have to make their consumers pay their prices.
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