‘Greedflation’ explored: Are businesses making inflation worse through excessive profits?
It’s an ugly word for an ugly phenomenon. ‘Greedflation’ is the new buzzword in economics.
The thesis is quite simple. While a certain chunk of the inflation we’re currently living through can undoubtedly be put down to higher energy prices and a chunk put down to higher wages as employers pass those costs onto their workers, there’s a sizeable chunk that comes back to something else: profits.
Some economists argue that businesses are using the cost of living crisis as an opportunity to generate excessive profits.
This isn’t just an idle theory. Economists at the European Central Bank (ECB) actually have some statistical evidence to back it up.
You can only learn so much by breaking down the consumer price index, the traditional measure of rising prices (inflation, let’s not forget, is simply the rate at which the prices of the average goods and services we spend most of our money on change each year).
That might tell you how much is down to food price inflation but it can’t give you a sense of how much of that given increase in food prices is benefiting workers versus their employers.
But there is another way of skinning the numbers. You can look instead at another measure of prices, something called the gross domestic product deflator.
Looking at prices this way, via another dataset, allows you to work out how much of the pricing pressure we’re currently seeing can be put down to profits and how much down to wages (or indeed other factors like taxes).
And the ECB chart is pretty stark:
The key thing to look at are the red slices of the bar. That’s showing you how much of the rise in prices in the past few years can be attributed to profits.
And it’s pretty clear that profits have been a considerable chunk of the recent increases in prices. Indeed, in the most recent couple of quarters of data, for late 2022, profits accounted for more of the rise in prices than wages (the green slices).
Now, some would argue that this isn’t necessarily profiteering. It’s simply businesses doing what they always do when there’s lots of demand for goods and raising their prices.
Without that response, the market as we know it simply wouldn’t function. Nonetheless, some say it underlines that a good chunk of the price squeeze is due to the greed of businesses.
So that’s the eurozone. How about the UK?
Well in the past few days we at Sky News have done a similar exercise to the ECB, using our own GDP deflator data to create our own ‘greedflation’ chart. And here’s what it shows:
A few obvious things leap out. The first is that enormous spike in prices and then the fall during COVID and its aftermath.
As far as I can tell this was in large part a function of the fact that wider measures of the economy were all over the shop.
It’s quite hard to know how much to read into anything going on during this yo-yo as for all we know it could be a statistical aberration (perhaps worthy of some further study).
But now look at the red slices. While the slice is certainly pretty big in the very latest quarter for which we have data (the final quarter of 2022), even in that quarter profits were still slightly smaller as a component part of the GDP deflator than wages.
And look a little further back and actually the contribution of profits to prices was far, far smaller than in the eurozone.
In other words, if this is our best statistical measure of ‘greedflation’ – and it seems to be – then we have considerably less of it here in the UK than there is on the other side of the Channel.
Tempting as it is to blame businesses for what we’re suffering through, there’s not an enormous amount of evidence from these figures that they are the main culprit. Actually, taxes (in other words the government) contributed much more to inflation in 2021 and into 2022 than business profits.
Now, with Britain facing double-digit inflation, a miserable cost of living crisis and rising interest rates, the above might not be of much consolation. And it’s quite possible the numbers may well shift – note that these figures are a little slow to be updated, so we don’t know the picture as of the early part of this year.
Even so, it’s a reminder that the data sometimes tells a subtly different story to the mainstream narrative.
The Bank of England governor has said industry lobby group the British Retail Consortium (BRC) was right to warn of job losses as a result of the budget.
There is a “risk” of unemployment rising due to increases in employers’ national insurance contributions and minimum wage rises announced by Chancellor Rachel Reeves last month, Andrew Bailey told MPs on the Treasury Committee.
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In a letter to Ms Reeves, the BRC warned of items becoming more expensive and job cuts stemming from the price pressures placed on firms by the new policies.
But firms will rebuild their profit margins, according to Mr Bailey.
He said: “Probably initially there will be more pressure on firms’ margins because it takes them longer to adjust and then they’ll probably rebuild those more profit margins, that is over time”.
Having previously said the budget could cause inflation to rise, Mr Bailey on Tuesday said price increases could slow or reverse thanks to the budget policies.
Fewer jobs would reduce competition among employers for workers, something which could bring down wages.
Wage rises have been one of the factors identified by Mr Bailey as behind high inflation since the COVID pandemic.
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BoE: Inflation expected to rise
How much will borrowing costs fall by?
A member of the Bank’s interest rate-setting Monetary Policy Committee, Professor Alan Taylor, told the MPs he expects interest rates to fall to 3.75% over the next year – down from the current 4.75%.
Interest rates could be lowered more quickly, he added, if inflation, wage growth and economic expansion are less than anticipated and unemployment ticks higher.
Why are mortgage rates going up?
When asked why typical fixed-rate mortgages have been going up in recent weeks, Mr Bailey said it was because of US political uncertainty before the election as well as the UK budget.
He pointed out that since the first interest rate cut in four years, announced in August, mortgage rates in the market have been lower.
Brexit and its hardline supporters
Echoing comments he made about Brexit and the need for increased cooperation with the European Union, Mr Bailey also levelled criticism at hardline Brexiteers.
“We should be in active dialogue with the EU,” he told MPs.
Keep up with all the latest news from the UK and around the world by following Sky News
The reason there have been outcomes “better than we feared they would be in 2016-17” for the financial services sector is because of open dialogue with EU colleagues, Mr Bailey said.
“I find it hard to understand people who seem to say that we should implement Brexit in the most hostile fashion possible.”
He added: “I take no position on Brexit. I never have. I’ve always said it’s my job to get on and do it and I’ll do it in the best way possible and I think talking, having a relationship with the European Union is the better way to do it.”
The scandal-hit Post Office has moved to cut its senior leadership team by half under efforts to reduce costs and bolster the business’s damaged culture.
New chairman Nigel Railton told a committee of MPs the move was started just moments after his transformation plan – a major effort to turn a page on the Horizon IT scandal – was revealed to Post Office staff last week.
He also confirmed that the total cost of the initiative, yet to be agreed with ministers, had been estimated at £1.2bn.
That sum, he said in his evidence to the business and trade committee, included the projected cost of a replacement for the Horizon accounting system.
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Mr Railton did also not deny that he could consider his position if the bill was not approved by the government.
The transformation plans could lead to more than 1,000 job losses through the closure of more than 100 so-called crown branches which currently lose significant amounts of money.
On top of that headcount figure are planned cuts to head office roles.
Revealed: The full list of 115 Post Offices at risk of closure
While no total has been set Mr Railton, who succeeded Henry Staunton after he was sacked by-then business secretary Kemi Badenoch in January, confirmed that it was in consultations with 30 out of 64 members of the current senior leadership team.
The wider transformation proposals include an aim to boost postmaster pay by a combined £250m over five years in a bid to remedy long-held complaints over remuneration.
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Union confusion over Post Office shake-up
The MPs held their evidence session as the public inquiry into the scandal nears its conclusion, with just closing speeches to be made ahead of the publication of the findings next year.
The compensation and redress issue is continuing to dominate the fallout amid the criticism over delays after the blanket quashing of wrongful theft convictions linked to the faulty accounting system software.
The MPs’ raised concerns, that were supported by witnesses including Mr Railton, that the redress schemes still needed to go faster despite some improvements in processes.
Attention is, however, also turning to potential prosecutions connected with the scandal though such charging decisions could take years to materialise.
Sky News revealed on Monday that police, who have been monitoring evidence and submissions to the inquiry, are investigating up to four individuals to date on suspicion of offences including perjury.
Ministers are considering a new ownership model for the business, which could result in an employee-owned future akin to the John Lewis Partnership structure.
Dozens of retail bosses have signed a letter to the chancellor warning of dire consequences for the economy and jobs if she pushes ahead with budget plans which, they say, will raise their costs by £7bn next year alone.
There were 79 signatories to the British Retail Consortium’s (BRC’s) response to Rachel Reeves’ first budget last month, a draft of which was seen by Sky News last week.
As farmers prepared to launch their own protest in London over inheritance tax measures, the retail lobby group’s letter to Number 11 Downing Street was just as scathing over the fiscal event’s perceived impact.
It warned that higher costs, from measures such as higher employer National Insurance contributions and National Living Wage increases next year, would be passed on to shoppers and hit employment and investment.
The letter, backed by the UK boss of the country’s largest retailer Tesco and counterparts including the chief executives of Sainsbury’s, Next and JD Sports, stated: “Retail is already one of the highest taxed business sectors, along with hospitality, paying 55% of profits in business taxes.
“Despite this, we are highly competitive, with margins of around 3-5%, ensuring great value for customers.
“For any retailer, large or small, it will not be possible to absorb such significant cost increases over such a short timescale.
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PM vows to defend budget decisions
“The effect will be to increase inflation, slow pay growth, cause shop closures, and reduce jobs, especially at the entry level. This will impact high streets and customers right across the country.
“We are already starting to take difficult decisions in our businesses and this will be true across the whole industry and our supply chain.”
The budget raised employers’ National Insurance contributions by 1.2 percentage points to 15% from April 2025, and also lowered the threshold for when firms start paying to £5,000 from £9,100 per year.
It also raised the minimum wage for most adults by 6.7% from April.
The BRC has previously pleaded for the total cost burden, which also includes business rates and a £2bn hit from a packaging levy, to be phased in and its chairman has said the measures fly in the face of the government’s “pro-business rhetoric” of the election campaign.
Official data covering the past few months has raised questions over whether the core message since July of a tough budget ahead has knocked confidence, hitting employment and economic growth in the process.
The government was yet to comment on the letter, which pleaded for an urgent meeting, but a spokesperson for prime minister Sir Keir Starmer has previously stated in response to BRC criticism that the budget “took tough choices but necessary choices to fix the foundations, to fix the fiscal blackhole that the government had inherited and to restore economic stability.”
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