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Big Oil, business, Coca Cola, consumers, cost of living, Darden Restaurants, demand, economics, gasoline prices, General Mills, Greedflation, inflation, oil prices, Procter & Gamble, productivity, stimulus, Strategic Petroleum Reserve, supply, {What's Left of) Our Economy
More evidence has just come out debunking the seemingly reviving claims (e.g., here and here) that corporate greed is largely responsible for the inflation plaguing the U.S. economy. That matters crucially because if Americans don’t understand the paramount drivers of the cost-of-living crisis, it’s unlikely it’ll ever be resolved satisfactorily, or at least not anytime soon.
To begin at the beginning, charges of “greedflation” by the business sector really took off last year, when politicians almost entirely on the left began blaming U.S. and other big global oil companies (along with Russia’s Ukraine war) for the soaring energy prices that were igniting inflation at the gas pump and throughout the economy.
Once gasoline prices began going down, these claims naturally became harder to justify. Did the oil companies suddenly become less greedy? Of course not. What happened mainly was that demand for energy subsided because the economy was slowing, and both developments in turn stemmed from oil prices increasing enough to become less affordable for a critical mass of consumers and businesses.
Even the role played by the Biden administration’s decision to restrain prices by through unprecedented releases of oil from the Strategic Petroleum Reserve (SPR) ssupports the argument that demand and its flip side, supply, are the predominant drivers of prices over any significant period of time. The SPR release temporarily boosted the supply of oil relative to the demand, and so prices eased as long as that effect held.
At the same time, as I’ve continually pointed out, U.S. inflation rates generally speaking have stayed far too high. I’ve argued (notably here) that the main reason is that U.S. consumer demand has stayed robust, too – that is, businesses have kept raising prices because enough American individuals and households have been able to pay and have kept retail cash registers ringing loudly. I’ve added that these inordinately (indeed, multi-decade) heated price levels have remained affordable because CCP Virus-period government stimulus packages have provided them with inordinate amounts of spending power, which has kept demand inordinately high.
And even though many consumers have already spent most of these extra resources, and consumer spending may be softening, other important supports for consumer demand have emerged, principally very low levels of unemployment and new government spending not explicitly tied to Covid stimulus – like the latest cost-of-living adjustment for Social Security recipients, expanded food stamp eligibility, and more generous veterans’ benefits. (See, e.g., this post.)
Moreover, I’ve contended (in that post linked immediately above and others) that more inflation fuel is likely, as government responds to the approach of a new presidential election cycle by opening the spending spigots wider to keep more likely voters reasonably happy, and because I’m expecting the Federal Reserve to chicken out in its fight against inflation – which has depended on slowing down economic activity (including consumer spending) by making business, individual, and household borrowing more expensive.
So what’s the new evidence that consumer demand remains vigorous and will probably stay strong enough to sustain inflation? Recent earnings reports from some of America’s biggest consumer products companies.
There’s Procter & Gamble, which has raised prices by double digits for two straight quarters, which grew its revenue largely because it not only increased prices, but also sold greater amounts of goods in its biggest market, the United States, and which maintained that the consumer “is holding up well.”
There’s Coca Cola, which – like P&G, beat estimates because of both “price hikes and higher demand,” and which also said that “consumers stayed resilient.”
There’s General Mills, whose “executives said inflation isn’t letting up, but customers are sticking with its products despite higher prices in grocery stores.”
There’s Darden Restaurants (think Olive Garden, Texas Roadhouse, Capitol Grille), which is building new establishments, and whose CEO said that (a paraphrase here) strong recent sales growth stemmed from “its strategy of pricing below inflation” (maybe a low bar nowadays?) but also that “consumers aren’t trading down.”
None of this means that strong U.S. consumer demand will continue indefinitely, or that living costs aren’t harming many Americans’ finances lately. Moreover, the relationship between demand and price isn’t the same for everything we buy. In particular, the prices of some goods and services, like necessities, tend to be what economists call “inelastic.” Their sales levels don’t change much, let alone in lockstep, when prices rise or fall. Even in these cases, however, some of the aforementioned trading down or cutting back is possible, along with some offsetting behavior changes (as with the gasoline example mentioned near the beginning here).
But keep in mind that the above companies couldn’t have become so big and successful if they weren’t good at judging the state of the American consumer and his or prospects – at least in the short and medium term. If they’re sounding confident about their customers’ wherewithal, chances are we should be, too.
And although no one should ever under-estimate corporate greed, no one should ever forget that without demand for a given product or service coming from somewhere, greed alone can’t produce it.
So despite all the efforts to blame companies for ongoing strong inflation, the best way to think of it is that timeless observation from the old “Pogo” comic strip: “We have met the enemy and he is us.” With a huge helping hand from Washington to be sure.
And the real remedy? Boosting the supply of goods and services relative to demand, either by reducing spending (and taking the short-term economic pain), increasing supply (for example, through targeted initiatives like encouraging domestic energy production, or broader efforts like improving productivity), or some combination of these measures.