Inflare is Latin for ‘to blow into’ or ‘inflate’. No prize for guessing the word from which inflation is derived, but can you guess where, when and why the word came into being? The US would have been a safe guess; as for the year, it was 1838, and the word referred to the inflating of a currency.
At the time, the term was used “not in reference to something that happens to prices, but as something that happens to a paper currency”. It was a description of monetary policy, which today is a central bank’s primary tool for promoting sustainable economic growth by controlling the overall money supply. Think interest rates.
Today inflation is used to denote the rate of increase in prices over a specified period. There are said to be four types: hyperinflation, galloping inflation, walking inflation and creeping inflation. This might have economic purists gasping for air, as they would argue that there are only three ’flations, namely inflation, deflation and stagflation. Regular readers of this column might contend there are in fact four, adding shrinkflation, for which a reference would be the instalment of this column published on February 1, 2019. In a recent instalment, published on April 21 and titled ‘Getting less for more’, shinkflation was the central focus, in relation to its application to services.
But alas, there is another ’flation – greedflation – which increases the count to five. As I was researching for this article, it became apparent there is a sixth – greenflation – which is a rise in energy prices as a result of the shift from fossil fuels to sustainable energy sources.
Back to greedflation – the word ‘greed’ originates from the Old English grædig, which means “always hungry for more”. If you believe Gordon Gekko, the fictional corporate raider in Oliver Stone’s 1987 film Wall Street, then greed is good. The actor portraying Gekko, Michael Douglas, is quoted as saying: “Greed is good! Greed is right! Greed works! Greed will save the USA!” His sentiment is shared by Rebecca M Blank, an economist (I have warned you against economists before) and US Secretary of Commerce in the Obama administration, who says: “Greed is good to most economists. It’s greed that makes people work harder, be more productive and helps the economy grow.” Of course, the counterargument is that greed is one of the seven sins, along with pride, lust, envy, gluttony, wrath and sloth.
The theory (some call it a fringe theory) of greedflation originates from the idea that large corporations exploit inflation to create excessive profits. In other words, they price-gouge during inflationary periods, especially when the underlying cost of production has not risen accordingly.
When you corner an economist (which rarely happens), if they don’t deflect by starting to answer your question with “It depends”, they will revert to supply and demand. This can be summarised by this joke: How many economists does it take to change a light bulb? It depends on the supply and demand curves.
If the economist is worth their salt, they will introduce a level of complication by referring to elasticity, which is a measure of the responsiveness of one economic variable to a change in another. They will, no doubt, add price elasticity of supply and price elasticity of demand.
In a recent speech, US Fed Vice Chair Lael Brainard pointed out that wages were not the main driver of inflation and mentioned the ‘price-price spiral’, where companies mark up prices far higher than increases in their input costs.
The knock-on effect is the ‘wage-price spiral’, which postulates that as prices for goods increase, workers will demand and receive higher pay, which would, in turn, drive prices even higher.
Greedflation does not blow into; rather it sucks life out of the economy.