No, corporate greed is not the cause of inflation.

Corporate greed is not causing inflation, despite the claims of many on the political left who have failed to understand the fundamentals of economic supply and demand.

“If you look at what people have, they have money to spend. It pisses them off and it pisses me off that you have to spend more. It is 20% less for the same price. This is corporate greed. This is corporate greed. And we have to face it. And that’s what I’m working towards.” – President Biden Your CNN

Yes, prices have certainly gone up due to inflation. However, this was not the fault of the corporations. The rise in inflation resulted directly from the supply-to-demand imbalance caused by the shutdown of the economy (supply) and increasing the purchasing power of families by sending them checks (question).

For most Americans who now get theirs “News” from social media, the uneducated masses now have a new hate target for their financial woes – corporate greed.

An Absurdity Claim

The problem, as with many of the narratives fueling American outrage on social media, is that it’s patently false.

like Michael Maharrey previously written:

“You just have to reason through the claim to discover the absurdity. If corporations can raise prices willy-nilly and enjoy “excess” profits, why don’t they do it all the time? Are corporations suddenly greedy in 2021? And why did the Federal Reserve spend a decade worrying that inflation was ‘too low’ while trying to reach its 2% target? Wasn’t there enough corporate greed before the coronavirus?”

When you think about it this way, apparently something else happened.

Let’s start with Powell’s assessment of the cause of inflation.

“The next episode of High inflation initially emerged from a clash between very strong demand and supply constrained by the pandemic. By the time the Federal Open Market Committee raised the policy rate in March 2022, it was clear that the reduction in inflation would depend both on the mitigation of the unprecedented distortions of demand and supply related to the pandemic, and on the tightening of monetary policy on our part, which would slow the growth of aggregate demand, allowing time for supply to catch up.

It is essential to emphasize the complete removal of the underlying causes “The clash between robust demand and pandemic-constrained supply.” I suspect this was intentional to avoid placing blame at the feet of the current or previous administrations or themselves. However, it obscures the impact of their actions that created the problem.

The following economic illustration is taught in every “Walking 101” class. Not surprisingly, inflation is the consequence if supply is limited and demand is increased through monetary interventions.

• Who had the power to shut down the entire economy and force everyone into their homes using a campaign of fear? Was it war, corporations, or the government?
• Who then gave trillions in stimulus checks directly to households to spend when no supplies could be produced? Was that a corporation? Russia? Or was it the government?
• Who backed the issuance of trillions in debt issuance to fund those stimulus checks and keep interest rates depressed? It was the Federal ReserveRussia or corporations?
• Was it the corporations that put a moratorium on student loans, rent and mortgage payments, giving individuals a source of additional funds to spend? Or was it the government?

Milton Friedman also had a lot to say on the matter.

Corporate greed does not cause inflation

Regarding inflation, many armchair economists are quick to quote Milton Friedman.

“Inflation is always and everywhere a monetary phenomenon.”

The problem is that there is much more to Friedman’s statement on the cause of inflation.

As Milton Friedman once said, corporations don’t cause inflation; governments create inflation by printing money.

“It is always and everywhere the result of a lot of money, of the faster growth of money, than of production. Furthermore, in the modern era, the next important step is to recognize that today governments control the amount of money so that, as a result, inflation in the United States takes place in Washington and nowhere else. Of course, no government likes to be responsible for bad things more than any of us.

We are all human. If something bad happens, it wasn’t our fault. And the government is the same way, so it does not accept responsibility for inflation. If you listen to people in Washington talking, they will tell you that inflation is produced by greedy businessmen, either it’s manufactured by syndicates, or it’s manufactured by consumerism, or maybe it’s those horrible Arab sheikhs who are producing it.”

As he concludes:

“But none of them produce inflation, for the very simple reason that neither businessmen, nor unions, nor housewives have printing presses in their basements. on which they can issue those pieces of green paper that we call money. Only Washington has the printing press, and therefore, only Washington can produce inflation.”

Rising inflation has nothing to do with corporate greed taking advantage of consumers, but with the actions of the Federal Reserve and the Government. The cause of inflation was the economic consequence of “Too much money chasing too few goods.”

Milton Friedman’s statement is supported by the graph below showing the M2 money supply compared to inflation (16 months late).

You can watch Milton’s entire speech at “Money and Inflation”.

Corporations respond to inflation

So if it’s not corporate greed, why are corporations jacking up the prices of everything so much?

Corporations have a responsibility to their shareholders to stay in business. If the costs to their business increase (ie wages, benefits, goods, utilities, etc.), such should be included in the selling price to maintain profitability. Crucially, corporations can pass on higher input costs to consumers if demand remains higher than the available supply of those goods or services.

In 2020 and 2021, corporations could pass most of the inflationary increase on to consumers as they were willing to spend the government’s money. However, as excess savings run out, inflation falls as consumers cut back on spending. Corporate profits weaken as the ability to pass on higher input costs to customers fades. As shown, as inflation declines, the rate of change in corporate profits also weakens.

We see the same thing if you use a two-year average of corporate earnings minus inflation. Again, when inflation picks up in 2020, corporations may pass most of the cost increase on to consumers. Today, as inflation slows due to falling demand, corporations must absorb inflation to sell products or services.

Another way to look at this issue is by comparing the difference between the consumer price index (what consumers pay for goods and services) and the producer price index (what corporations pay). When inflation rises and consumer demand exceeds supply, corporations can pass on higher input costs to consumers. Corporations absorb higher input costs when inflation falls to sell products or services.

Here is the crucial point:

“Corporations do not create inflation. They simply react to changes in demand and adjust prices and supply to maintain profitability. When consumerism slows down, corporations cut prices to reduce supply.”

Who is responsible for inflation?

If there is one “greed factor” In inflation, it is more a function of political policy and Wall Street. Let’s start with the political policies.

Most government policies are enacted to appease the masses in one form or another, but mostly to appease those who fund campaigns to keep them in office. We’ve already dealt with the side effects of shutting down the economy and sending checks to families while suspending debt payments. This was not about corporate greed, but the voting base was getting happy “free money”.

There are also policies pushed at the state level that result in higher inflation but keep politicians in office. For example, raising the minimum wage in California to $22 an hour is an inflationary policy. The obvious corporate response is to raise prices to offset higher wage costs.

As discussed in “$15/hour costs and consequences,” Salary increases are not a “free lunch”. To understand:

“Labor costs are the highest expense of any business. It’s not just actual wages, but also payroll taxes, benefits, paid vacation, health care, and more. Employees are not cheap and this cost must be covered by the goods or services sold. Therefore, if the consumer refuses to pay more, the costs must be offset elsewhere.

For example, after Walmart and Target announced higher minimum wages, layoffs occurred and cashiers were replaced with self-checkout counters. Restaurants added surcharges to help cover higher wage costs, a “tax” on consumers, and chains like McDonald’s and Panera Bread replaced cashiers with apps and ordering kiosks.

Additionally, Wall Street itself is a factor. Commodity prices are controlled by traders on the New York Stock Exchange. These traders look for opportunities to place bets on commodities based on many events that could affect supply, such as weather, transportation disruptions or geopolitical conflicts. Take a look at the commodity index below.

This rise in commodity prices, which resulted from the economic shutdown, increases the cost of input prices for corporations. This additional cost must be accounted for in the production process and ultimately passed on to the consumer.

This is not corporate greed. The increased cost to consumers is a byproduct of Wall Street raising commodity prices to take advantage of supply disruptions.

While it’s easy to blame corporate greed for higher prices, it’s not the corporations fault. As noted, corporations are responding to higher input costs to maintain profitability for both shareholders and stay in business.

No, corporate greed is not responsible for inflation.

Yes, it’s a nice fantasy that corporations should eat higher costs and be kind to consumers.

However, corporations are not charities.

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Lance Roberts is a Portfolio Strategist/Economist for RIA advisors. He is also the host of “The Lance Roberts Podcast” and editor-in-chief of “Real investment advice” website and author of “Real daily investments” blog and “Real investment report”. Follow Lance at Facebook, I tweet, LinkedIn AND to YouTube.