Greedflation and its counter arguments

Greedflation and its counter arguments

Subject : Economy

Section: Inflation and Unemployment

Concept :

• During a recent surge in inflation, the prices of tomatoes have experienced a significant increase within a month, affecting multiple cities in India the most.
• Although there is a reasonable explanation for this price surge, some speculate that it could be attributed to a phenomenon known as ‘greedflation’.

Greedflation

• Greedflation is currently on the rise in the United States and is one of the primary reasons why prices are being driven up in the country.
• In basic terms, is the inflation and hike in prices not driven by economic flow, but by corporate greed.
• It is termed as the inflation in prices of basic commodities which is driven by the companies to increase their profit margins.
• Greedflation simply means big corporations squeezing out money from customers by jacking up the prices of their products, only to increase their profit margins.

Is greedflation same as cost push inflation?

Greedflation has been compared to other theories of “cost­push” inflation which attribute inflation to a rise in input costs. For example, in the past, a rise in the wages demanded by workers has been blamed for the rise in the prices of goods and services. In the case of greedflation, it is the rise in the corporate thirst for profits that is seen as a cost that is driving up prices.

 A criticism of the cost-push theory of inflation has been that it ignores the fact that the cost of producing any good is itself determined indirectly, but ultimately, by consumers. It should be noted that the cost of inputs, which can be used towards different alternative ends of society, is determined by competitive bidding in the market.

Cost-Push Inflation:

Cost push inflation is inflation caused by an increase in prices of inputs like labour, raw material, etc. The increased price of the factors of production leads to a decreased supply of these goods. While the demand remains constant, the prices of commodities increase causing a rise in the overall price level.

Apart from rise in prices of inputs, there could be other factors leading to supply side inflation such as :

• Natural disasters or depletion of natural resources,
• Monopoly-single seller selling limited goods at comparatively higher price.
• Government regulation or taxation- especially indirect tax that raises price of of commodity
• Change in exchange rates-currency devaluation or depreciation making imports expensive
• Imported inflation-rise in price of imported goods

Generally, cost push inflation may occur in case of an inelastic demand curve where the demand cannot be easily adjusted according to rising prices.

Cost-Push vs. Demand-Pull Inflation:

Cost-push is one of the two causes of inflation. The other is demand-pull inflation. Demand-pull inflation is the primary cause of inflation. It occurs when the aggregate demand for a good or service outstrips aggregate supply, and it starts with an increase in consumer demand. Sellers try to meet the higher demand with more supply. If they can’t, then they raise their prices.

Is greedflation happening in India?

• Greedflation is on the rise in the United Kingdom and the US, but has not taken a fast pace in India yet.
• However, due to the increasing privatization of industries in India, it is likely that greedflation will make its entry into the country soon if the government doesn’t regulate the prices to prevent the gouging out of customers.

Shrinkflation

• It refers to a reduction in the quantity or quality of a product while the price remains the same.
• Production costs increase to a lesser extent while e-commerce businesses maintain the same retail price.
• The main advantage is that users generally don’t spot these changes.
• However, they do notice that prices remain unchanged despite inflation. This strategy is less likely to damage the brand or retailer’s corporate image.