Greedflation

Greedflation is a term for the claim that corporate pricing behavior, rather than costs or demand, was the driver of a period of inflation. Its clearest published statement comes from a Federal Reserve Bank of Kansas City study, which introduces it as "one potential explanation that has received significant public attention," namely "'greedflation'—that is, the idea that firms are capitalizing on their market power by raising their prices higher and faster than the growth in their production costs." The word itself is informal, coined in public commentary rather than by any statistical agency, but the hypothesis behind it has been given a definition and tested by institutions that publish their methods.

The accounting point comes before any evidence, because it decides what counts as evidence at all. From the same study: "profits and inflation do not have a direct accounting relationship. However, inflation is directly affected by growth in the markup—the ratio between the price a firm charges and the firm's current marginal cost of production. Inflation in a firm's prices is therefore the sum of the growth in the marginal cost of production and the growth in the markup." So a record profit level, or a rising profit share of national income, is not the quantity that bears on inflation. Markup growth is. The Federal Reserve Bank of San Francisco notes that "some studies have pointed to the strong growth in nonfinancial corporate profits in 2021 as evidence that increased markups have contributed to inflation," and gives its own reasons for not relying on that evidence: profit growth "is typically volatile," corporate profits "tend to rise in the early stages of economic recoveries," and they are "an imperfect measure of a firm's pricing power because several other factors can drive changes in profitability," among them lower business taxes, pandemic-era government support and lower net interest payments.

Because a firm's price change decomposes into two additive parts, cost growth and markup growth, any account of an inflation episode is implicitly making a claim about the split. The wage-price spiral is an account resting on the cost limb. Greedflation is an account resting on the markup limb. They are not alternatives in the sense that one must be right; they are two terms of one sum, and both can be small, or one can be large.

On the post-2021 United States, two Federal Reserve Bank studies produced findings that read as opposite, and the honest content of this page is that disagreement rather than a verdict.

The Federal Reserve Bank of Kansas City estimated the 2021 markup growth rate and reported: "We find evidence that markup growth was a major contributor to inflation in 2021. Specifically, markups grew by 3.4 percent over the year, whereas inflation, as measured by the price index for Personal Consumption Expenditures (PCE), was 5.8 percent, suggesting that markups could account for more than half of 2021 inflation. Such high markup growth is especially striking given that markup growth contributed almost nothing to inflation in the decade leading up to the COVID-19 pandemic."

Quoted on its own, that sentence inverts the paper. Its very next paragraph opens: "Although our estimate suggests that markup growth was a major contributor to annual inflation in 2021, it does not tell us why markups grew so rapidly. We present evidence that the timing and cross-industry patterns of markup growth are more consistent with firms raising prices in anticipation of future cost increases, rather than an increase in monopoly power or higher demand." The authors then give two specific reasons. On timing: the largest growth in markups "occurred in 2020 and the first quarter of 2021; in the second half of 2021, markups actually declined," so "inflation cannot be explained by a persistent increase in market power after the pandemic." On the cross-section: "markup growth was similar across industries that experienced very different levels of demand (and inflation) in 2021," which is not what monopolists responding to demand would produce. A study that measures large markup growth and then rejects the market-power explanation is not support for greedflation in the sense the word is normally used.

The Federal Reserve Bank of San Francisco looked at the whole post-pandemic arc and reported the opposite emphasis: "Since 2021, markups have risen substantially in a few industries such as motor vehicles and petroleum. However, aggregate markups—which are more relevant for overall inflation—have generally remained flat, in line with previous economic recoveries over the past three decades. These patterns suggest that markup fluctuations have not been a main driver of the ups and downs of inflation during the post-pandemic recovery." Two words in that passage carry the finding. "Aggregate" distinguishes economy-wide markups from the industries where markups did rise substantially, which the same paper names. "Fluctuations" refers to cyclical movement rather than to the level. Dropping either word turns a finding about aggregate cyclical movement into a claim that markups did not rise, which the paper itself contradicts in its own first paragraph.

The San Francisco study also records that "growth of nonfinancial corporate profits accelerated in the early part of the recovery," which it reads as suggesting "that companies had increased pricing power." It then declines to treat that acceleration as evidence about markups, for the reasons quoted above.

The two findings sit uneasily beside each other on magnitude, and the reasons are worth naming: they cover different windows, one calendar year against a multi-year recovery; they aggregate differently, industry-level against economy-wide; and they measure different things, one year's markup growth rate against cyclical markup movement. On the conclusion, though, the San Francisco authors do not read themselves as disagreeing. Their own sentence is that "changes in markups are not likely to be the main driver of inflation during the recovery, which aligns with results from Glover, Mustre-del-Río, and von Ende-Becker (2023) and Hornstein (2023) using different methodologies or data." Glover and his co-authors are the Kansas City study quoted above. So a reader who meets the 3.4 percent figure on its own and the "generally remained flat" finding on its own will take them as opposite verdicts, and neither can be quoted as the answer to how much markups drove inflation. Neither paper, though, supports the market-power reading the word greedflation asserts, and both establish the same thing about method: the variable to look at is markup growth, not profit levels.

Start from the decomposition. If a price is a markup applied to marginal cost, then the percentage change in the price is the percentage change in marginal cost plus the percentage change in the markup. Measuring the markup therefore requires an estimate of marginal cost, which is the hard part and the reason different studies reach different answers.

A hypothetical shows why a profit figure cannot substitute. Suppose a firm sells a product for $20 with a marginal cost of $16, so its markup ratio is $20 ÷ $16 = 1.25. Next year its marginal cost rises to $18.40, a 15 percent increase, and it raises the price to $23, a 15 percent increase. The markup ratio is $23 ÷ $18.40 = 1.25, unchanged. Every dollar of the price increase came from cost. Meanwhile, if the firm sold 1,000 units in year one and 1,100 in year two, its profit rose from ($20 − $16) × 1,000 = $4,000 to ($23 − $18.40) × 1,100 = $5,060, a gain of 26.5 percent. Record profits, zero markup growth, and no contribution to inflation from pricing behavior.

Reverse it to see what markup growth looks like. Hold marginal cost at $16 and raise the price to $23. The markup ratio becomes $23 ÷ $16 = 1.4375, a 15 percent increase in the markup, and the whole price increase is markup growth. The profit figure in this version, ($23 − $16) × 1,000 = $7,000, is larger. But the profit number alone cannot distinguish this case from the first one, which is the point of the accounting objection.

What the debate has clarified

• It identified the right variable. Markup growth, not profit levels or profit shares, is the quantity that enters an inflation decomposition.
• It produced published, methodologically explicit estimates from two Federal Reserve Banks, which is more than most contested macroeconomic claims have.
• It established that markup growth contributed almost nothing to U.S. inflation in the decade before the pandemic, which makes the post-2021 period a genuine question rather than business as usual.

Why the term should be handled carefully

• The word is a political coinage, and it attributes a motive. The studies measure markups, which are an arithmetic gap between price and cost, not an intention.
• The study that measured the largest markup growth explicitly rejects the monopoly-power explanation and favors anticipated future costs instead.
• The evidence does not settle the magnitude question. The Kansas City and San Francisco studies report figures a reader will take as opposite, though the San Francisco authors describe their own result as aligning with the Kansas City one.
• A profit headline is not relevant evidence, because profits have no direct accounting relationship to inflation and, as the San Francisco study notes, profitability moves with taxes, subsidies and interest costs as well as with pricing power.
• It addresses one limb of a two-limb decomposition, and the other limb, labor costs, has its own contested literature.