INFLATION '' GREEDFLATION '' INFAMOUS : MASTER GLOBAL ESSAY

 

GREEDFLATION : '' the very core of the problem.'' An unconventional but popular theory suggests that '' 'greedy firms' : shopkeepers, traders, service providers, wholesalers, just about everybody seeking profits, are at fault.''

[ World Economy : Inflation Wars. Economists furiously debate the causes of rising prices - and to quell them. But to no avail. ]

These sectors all and more swoop in '' and take advantage of the perceived or actual economic turmoil.'' With competition authorities negligent and lax, a whirlpool turns into a rising tide. It then spares no one.

FOR AS LONG as inflation has been high economists have fought about where it came from and what must be done to bring it down. Since central bankers have raised interest rates and headline inflation is falling, this debate may seem increasingly academic.

In fact, it is increasingly important. Inflation is falling mostly because energy prices are down, a trend that will not last for ever. Underlying or  ''core'' inflation is more stubborn. History suggests that even a small amount of sticky underlying inflation is hard to dislodge.

So the chiefs of the most important central banks are now warning that their job is far from done.

'' Getting inflation back down to 2% has a long way to go'', said Jerome Powell, Chairman of the Federal Reserve, on June 29. '' We cannot waver, and we cannot declare victory.''

Christine Lagarde, president of the European Central Bank, told a meeting of policymakers in Portugal just two days earlier. Andrew Bailey, governor of the Bank of England, recently said that interest rates will probably stay higher than markets expect.

THIS MEANS that there will be no let-up in the economists' wars.  The first front is partly ideological, and concerns who should shoulder the blame for rising prices.

An unconventional but popular theory suggests that greedy firms are at fault. This idea first emerged in America in mid-2021, when profit margins for non-financial companies were unusually strong and inflation was taking off.  

IT IS NOW GAINING a second wind, propelled by the IMF, which recently found that rising profits   ''account for almost half the increase'' in euro-zone inflation over the past two years.

Ms Lagarde appears to be entertaining the thesis, too, telling the European Parliament that ''certain sectors'' had ''taken advantage'' of the economic turmoil and that ''it's important competition authorities could actually look those behaviours.''

GREEDFLATION is a comforting idea for left-leaning types who feel that blame for inflation is too often pinned on workers. Yet it would be strange to think firms suddenly became greedier, making prices accelerate.

Inflation is caused by demand exceeding supply -something that offers plentiful profit opportunities. The greedflation thesis thus ''muddles inflation's symptoms with its cause'', according to Neil Shearing of Capital Economics, a consultancy.

Wages have tended to play catchup with prices, not vice versa, because, as the IMF economists note, '' wages are slower than prices to react to shocks''.

That is a crucial lesson from today's inflationary episode for those who always view economic stimulus as being pro-worker.

This Publishing of this '' Master Essay '' continues to Part 2. The World Students Society thanks  The Economist.