Greedflation: This Cost of Living Crisis Is Unlike Any Other.

Is the cost of living crisis we're all going through right now just a result of price gouging? It very well could be, but also maybe there's more to it. This is a really interesting topic that's been running all over the Internet across the last year or two because, as we all know, inflation has been really high pretty much globally. But at the same time, many companies have been recording record profits. How does that work? I thought this economic downturn was supposed to mean businesses struggled and the stock market fell. Maybe not.

Right now, the S&P 500, the stock market index that tracks the 500 largest companies in America, is pushing close to all-time highs. So, what's the deal here? Is the inflation we've seen over the past few years really a result of a global economic crisis, or is it really just the result of corporations getting greedy? Well, let's find out.

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Inflation is measured by the rise of a number called the Consumer Price Index. This is an imaginary basket of essential goods and services, and by tracking the price of what the basket of stuff would cost, we can get a good understanding of overall price movements in the broader economy.

As a quick history of inflation leading up to the pandemic, there was actually extremely low inflation—like really, really low. Prices weren't rising quickly at all. Interestingly, inflation actually fell at the onset of the pandemic because everyone was locked down, and demand fell off a cliff. But that didn't last for long as supply got choked globally and demand returned. Inflation spiked from zero to roughly nine percent in the space of just two years. Luckily of late, inflation has been cooling back to more normal levels, but it's still no secret that while prices may not be rising steeply right now, that basket of goods and services is still roughly 18 percent more expensive than it was before the pandemic. The quest question is why.

So, let's start with the greedflation angle. This is the idea that most of the inflation we've seen has been the result of corporate profiteering, using inflation as a guise to instead gouge prices and make more money. Well, have a look at this article from the Economic Policy Institute. Now, this article is more than a year old at this point, but it conveys the message that a lot of people are thinking. They note the price of just about everything in the US economy can be broken down into three components of cost.

These include labor costs, non-labor inputs, and the markup of profits over the first two components. For example, if we look at a bottle of Coke, how much cost was required to pay the employees to get that bottle of Coke made? Then, what did it cost in raw materials to actually make the bottle and to make the Coke? And then finally, what was the markup above their costs that Coca-Cola put on the bottle to turn a profit?

The article notes good data on these separate cost components exist for the non-financial corporate sector of the economy, those companies that produce goods and services, which makes up roughly 75 percent of the entire private sector. Now, they noted that since the COVID recession in Q2 of 2020, up to when the article was published, overall prices in that sector rose 6.1 percent annually versus 1.8 percent annual price growth from 2007 to 2019.

But what's very interesting is that they found that 53.9 percent of this inflation can be attributed to fatter profit margins, AKA over half of this particular price inflation is a result of corporations increasing the distance between the cost of the Coke bottle and the price that they sell it for. If we dive a little deeper, we can have a look at this chart which shows that labor costs contributed just 7.9 percent of the price growth in the post-COVID era versus 61.8 percent from 1979 to 2019.

And they also found the increase in materials costs contributed 38.5 percent of the price growth post-COVID versus 26.8 percent from 1979 to 2019. So, inflation in raw materials is most certainly real, but the stinger is definitely that top line with corporate profits accounting for 53.9 percent of the post-COVID price inflation.

Another investigation done by The Guardian looked at 100 U.S. corporations and found that profits rose by a median of 49 percent over a two-year time period, ending with their most recent quarterly filings, which was either late 2021 or early 2022. They note that companies like Albertsons, Amazon, and Chevron saw major increases in their quarterly profits, with steel producers Steel Dynamics seeing an 809 percent rise in profit. On the flip side, at the base of that graph, in that same time, U.S. workers' wages rose just 1.6 percent.

They also call out the messaging from these big corporations, with companies like Hershey's positioning itself as a victim of inflation when, in reality, Hershey's net profits spiked 62 percent between the fourth quarters in 2019 and 2021. It's operating margin-wide, and they even rewarded shareholders with a 200 million dollar share buyback.

At the same time, Hershey's CEO even told investors that pricing will be an important lever this year and is expected to drive most of our growth. Another example is Chevron. At the time, Chevron announced two of the best quarters the company had ever seen and vowed to keep production low to maintain prices. Steel Dynamics noted it was not materially affected by inflation as higher prices exceeded increased supply chain costs. Fertilizer giant Nutrien said the highest selling prices more than offset raw materials costs and lower sales volume.

The list goes on. So, I think the evidence is certainly there to suggest some degree of price gouging by major corporations. But there is another side to the argument that might explain why some of the price hikes have occurred, and it's to do with economics. More specifically, it's a result of economic stimulus, and even more specifically, it's thanks to the Federal Reserve printing a lot of money and the government then giving it to citizens.

Since the onset of the pandemic in 2020, the Federal Reserve has printed around four trillion dollars—money which gets injected into the economy to try and keep it running smoothly during an economic crunch. Now, some of that money was straight-up gifted to citizens in the form of stimulus checks. Some of that money went towards the government's spending on infrastructure projects and so on. But the point is the money was put into the economy, and what did this cause?

Well, it caused exactly what the government was hoping for—more spending on goods and services, which stimulates the economy. But remember, we live in a free market economy, where prices are set in most part by supply and demand. Now, when you gift a whole lot of people a whole lot of money, and they decide to spend it all at once, you'll undoubtedly disrupt the supply-demand equation. Demand will rise, and prices will rise.

So, some might call it price gouging by corporations, but others simply call it the natural consequence of increasing demand for goods and services in the system that we have. Is it the corporation's job to self-regulate prices so they can make sure everyone can afford groceries, or is it their job to maximize their profits in order to reward shareholders? Whether you like it or not, in our current system, it's the latter that wins out.

The role of corporations is to increase shareholder returns as effectively as possible within the bounds of the law. I'm not saying that that's necessarily right or wrong, but that's the system we live in. So, I find this greedflation topic really interesting to talk about because on the one hand, you know it's a slam dunk: corporations have seen massive increases to their profit margins. I don't like the narratives that they've been spinning, where they kind of say that they're the victim of inflation when, really, on their earnings calls they say that they're able to use inflation to their advantage.

But what can you really expect from corporations in that regard? On top of that, I can also see the argument that even if inflation is just from greedy corporations, well, maybe you can actually trace back the root cause to the government and the Federal Reserve, who have stimulated massive demand for goods and services, which has given the corporations the ability to jack up prices with no consequences.

It's a really interesting debate because I don't think there's necessarily a definitive culprit. So, I'd love to hear what you guys think. With the statistics out there for the world to see, where do you sit on the issue? Are corporations to blame, or do we stand by the free market economy and shift the blame more towards the government and the Central Bank? Definitely let me know down in the comment section below. This topic is obviously quite political, so let's please try and keep it respectful.

Let's respect everyone's opinions, even if they don't align with our own, and let's continue the discussion. Also, I just wanted to remind everybody before I sign off that we've now opened the waitlist for our upcoming course content. We're completely redoing stock market investing for beginners and the big one—introduction to stock analysis—that you guys really enjoyed last time. So if you wanted to get on the waitlist and potentially score early access bonuses, the link is in the description and in the pinned comment.

The courses are looking really good; I think you guys are really going to enjoy them. But apart from that, please leave a like on the video if you did enjoy it, subscribe if you'd like to see more, and with that said, I'll see you all in the next video.

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