The year-to-year inflation rate in the U.S. reached 8.6 percent in May, the highest since 1981. Politicians have been slow to act to combat inflation, but they are quick to assign blame on companies, calling it “greedflation.”
The message here is clear: Companies — mostly monopolies — are price-gouging consumers, and that is why we have the 41-year high inflation rate. As evocative as the term is, “greedflation” is nothing but “blameflation,” which happens periodically when the U.S. economy, politicians, or both are in trouble.
Blameflation does nothing but distract the country from the real issues — and real solutions.
Blaming companies is appealing precisely because it is believable, as both food and oil companies are making enormous profits today, while average American consumers are struggling to pay their food bills and fill up their gas tanks. Not to mention the blame is politically charged and often enraging, as it puts the spotlight on the monopolies of Big Oil and Big Food.
If there is blame to assign, it should be toward the environment in which American companies are forced to operate. You can point your finger at many contributing factors: the pandemic; labor shortage and supply chain issues; the Russian invasion of Ukraine and other geopolitical issues; high oil prices; $1.9 trillion stimulus spending; tighter regulations on fossil fuels, etc. There is only so much pounding even a good economy like the one in the U.S. can take — and right now it is certainly taking a lot. When you combine the combustible mixture of high demand, low supply, and run-away energy costs, you have a perfect formula for high potency inflation.
In this environment, companies are doing exactly what they are supposed to do: raise prices when they can to make more money and invest in more production when profitable. During inflation, companies are motivated to raise their prices as consumers are more receptive to price increases due to cost increases. Competing firms are all eager to pass on their cost increases, and supplies are tight. What executive in their right mind would find a reason not to seize the opportunity and increase their prices?
If the government forces companies to maintain pre-inflation prices, or even shames them into doing so, the likely outcome is that we will not see more production any time soon. In fact, the situation might actually get worse, leading to more empty shelves and long lines at gas pumps. Then, consumer hoarding will follow, and even higher inflation may ensue. No good economic policy can come out of this politically expedient of blameflation.
The issue of monopolies articulated in this atmosphere of blameflation is a red herring, given that there is no evidence of companies colluding to raise prices. The fact of the matter is that companies do not need to conspire to raise their prices together in an inflationary environment. More importantly, those monopolies were there before the pandemic, and some of those same monopolies lost a lot of money in 2020. ExxonMobil, for instance, the company that makes “more money than God,” as President Biden put it, lost $22.4 billion in 2020.
If the government wants to take money away from companies when they make good money, is it willing to subsidize them when they lose money? If so, we will not have a free economy. If not, we still do not have a functioning free economy.
The truth is that the U.S. economy is in a bind now as far as fighting inflation goes.
The U.S. cannot do much about the Russian invasion of Ukraine or COVID lockdowns in China. For the things it can influence, a belated increase of the interest rate by the Fed could successfully fight inflation, but if done too aggressively, it could lead to a bad recession, which is politically unpalatable during a mid-term election year.
Reducing government spending is an old wisdom for fighting inflation, but campaign promises will have to trump any conventional wisdom.
Bringing down fossil fuel costs can help to ease inflation right away, but high prices for fossil fuels will surely help the transition to clean energy, albeit in a painful way. Given that the country is rushed by deliberate policies to phase out fossil fuels, can you blame Big Oil for cashing out in a hurry in a policy-driven sunset industry, instead of investing for more production?
Even though the last period of high inflation was four decades ago, the prescription for an effective solution remains the same: decrease aggregate demand and increase supply to kill inflation expectations. To achieve both, there has to be a strong and united political will on government spending, and on lowering energy costs.
Indeed, it is important to realize that high energy costs are not just an issue of inflation. It is an issue of the competitiveness of U.S. companies on the global stage. Many Asian investors come to the U.S. because of low energy costs, and many U.S. manufacturers can still compete against those from Asia because of low energy costs. When U.S. companies lose even more of their competitive edge due to high energy costs, there will be some real blame to go around.
Z. John Zhang is a Professor of Marketing at the Wharton School of the University of Pennsylvania.