‘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 head of Britain’s biggest energy supplier has claimed his competitors oppose proposals for so-called postcode pricing because they financially benefit from the current system.
Octopus Energy chief executive Greg Jackson told Sky News his business’s rivals were against customers being charged based on where they lived, rather than on a national basis, because they would lose out on profits.
He said: “A very small number of companies that today get paid tens of millions, sometimes in a single day, to turn off wind farms and generate gas elsewhere, don’t like it.
“The reason you’re seeing that kind of behaviour from the rivals is they are benefiting from the current system that’s generating incredible profitability.”
The government is currently considering whether to introduce the policy, which is also known as zonal pricing. Energy secretary Ed Miliband is expected to make a decision on the proposals by this summer.
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Octopus has become Britain’s biggest supplier with more than seven million customers.
Mr Jackson has been a vocal proponent, as he said he wants to charge customers less and boost government electrification policies by having cheaper electricity costs.
What is postcode pricing?
Zonal pricing would mean electricity bills are based on what region you live in.
Some parts of Britain, like northern Scotland, are home to huge energy producers in the form of offshore wind farms.
But rather than feeding electricity to local homes and businesses, power goes into a nationwide auction and is bought to go across Britain.
As the energy grid is still wired for the old coal-producing sites rather than the modern renewable generators, it’s not straightforward to get electricity from where it’s increasingly produced to the places people live and work.
That leads to traffic jams on the grid, blocking paid-for electricity moving to where it’s needed and a system where producers can be paid a second time, to power down, and other suppliers, often gas plants, are paid to meet the shortfall.
Zonal pricing is designed to prevent paying the generators for power that can’t be used.
It would mean those in Scotland have lower wholesale energy costs while those in the south, where there is less renewable energy production, would have higher wholesale costs.
Whether bills go up or down depends on implementation.
Savings from one region could be spread across Britain, lowering bills across the board.
Mr Miliband has said he’s not going to decide to raise prices.
However, SSE’s chief executive Alistair Phillips-Davies described the policy as a “distraction” and said it could affect already agreed-upon upgrades of the national grid that will lower costs.
“I think you’ve got a very, very small number of people who are asking for this. It’s just a distraction. We should remove it now,” he said.
While Octopus Energy estimates that said postcode pricing could be introduced in two to four years, Mr Phillips-Davies said it could take until 2032 before it was implemented, by which time Britain would have “built much of the networks that are required to get the energy from these places down into the homes and businesses that actually need it”.
“We just need to stay true to the course,” he added.
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Unions, as well as industry and energy representatives, have also spoken out against the policy. Opponents include eco-tycoon Dale Vince and trade body UK Steel.
A joint letter signed by SSE, UK Steel, Ceramics UK and British Glass, along with the unions GMB, Unite and Unison, said zonal pricing could lead to scaled-back investment due to uncertainty and higher bills.
A separate letter signed by 55 investors, including Centrica and the Ontario Teachers’ Pension Plan, has also criticised the policy.
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Businesses facing fresh energy cost threat
However, Mr Jackson said many investors had not voiced opposition, with thousands of small and medium businesses instead backing the policy in the hope of paying less on energy bills.
The UK-US trade deal has been signed and is “done”, US President Donald Trump has said as he met Sir Keir Starmer at the G7 summit.
The US president told reporters: “We signed it, and it’s done. It’s a fair deal for both. It’ll produce a lot of jobs, a lot of income.”
As Mr Trump and his British counterpart exited a mountain lodge in the Canadian Rockies where the summit is being held, the US president held up a physical copy of the trade agreement to show reporters.
Several leaves of paper fell from the binding, and Mr Starmer quickly bent down to pick them up, saying: “A very important document.”
President Donald Trump drops papers as he meets with Britain’s Prime Minister Keir Starmer in Kananaskis, Canada. Pic: AP
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Sir Keir Starmer hastily collects the signed executive order documents from the ground and hands them back to the US president.
Sir Keir said the document “implements” the deal to cut tariffs on cars and aerospace, adding: “So this is a very good day for both of our countries – a real sign of strength.”
Mr Trump added that the UK was “very well protected” against any future tariffs, saying: “You know why? Because I like them”.
However, he did not say whether levies on British steel exports to the US would be set to 0%, saying “we’re gonna let you have that information in a little while”.
Sir Keir Starmer picks up paper from the UK-US trade deal after Donald Trump dropped it at the G7 summit. Pic: Reuters
Mr Trump also praised Sir Keir as a “great” prime minister, adding: “We’ve been talking about this deal for six years, and he’s done what they haven’t been able to do.”
He added: “We’re very longtime partners and allies and friends and we’ve become friends in a short period of time.
“He’s slightly more liberal than me to put it mildly… but we get along.”
Sir Keir added that “we make it work”.
The US president appeared to mistakenly refer to a “trade agreement with the European Union” at one point as he stood alongside the British prime minister.
Mr Trump announced his “Liberation Day” tariffs on countries in April. At the time, he announced 10% “reciprocal” rates on all UK exports – as well as separately announced 25% levies on cars and steel.
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In a joint televised phone call in May, Sir Keir and Mr Trump announced the UK and US had agreed on a trade deal – but added the details were being finalised.
Ahead of the G7 summit, the prime minister said he would meet Mr Trump for “one-on-one” talks, and added the agreement “really matters for the vital sectors that are safeguarded under our deal, and we’ve got to implement that”.
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