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The ‘Theory’ of “Greedflation” Is Rank Nonsense

Here’s a letter to Axios:

Editor:

According to Emily Peck, “greedflation” is finally receiving the serious attention that it deserves as an explanation of inflation (“Once a fringe theory, ‘greedflation’ gets its due,” May 18). Renamed “sellers’ inflation” to avoid critics who correctly note that there’s no reason to suppose that corporations have only recently grown more greedy, this ‘theory’ holds that today’s inflation is caused by corporations greedily raising prices in order to pad their profits.

Alas, Ms. Peck is confused on several particulars, but one confusion looms above all: she ignores economists’ dominant theory of inflation. This widely and long-accepted theory – colloquially called “demand-pull” – explains inflation as the result of an increase in the supply of money relative to the demand to hold money. With excess money holdings, buyers bid prices up across the board. All sellers are able to charge higher prices only because the monetary authority has injected into the economy excess spending power.

For the theory of “sellers’ inflation” to work, therefore, it would have to explain observed inflation better than does the demand-pull theory. Yet Ms. Peck compares “sellers’ inflation,” not to the demand-pull theory, but only to the long-discredited “cost-push” theory of inflation. Indeed, “sellers’ inflation” is nothing more than a new twist on the “cost-push” theory.

It’s true that there’s no evidence that inflation is being caused by rising wages and input prices pushing output prices upward. But there’s also no evidence that today’s inflation is fueled by sellers’ intensifying greed pushing output prices upward. No matter how intense is sellers’ ‘greed’ for higher profits, consumers cannot pay higher prices across the board without additional money to do so – additional money that happens to have been injected into the economy by the Federal Reserve just as the rate of inflation accelerated. Sellers are raising prices across the board only because the Fed, by increasing the money supply, is giving consumers excessive amounts of money to spend.

Ms. Peck concludes that, because rising wages and input prices don’t explain today’s inflation, today’s inflation is best explained by corporate greed. This reasoning makes no more sense than would the conclusion that, because the Lamarckian theory of evolution doesn’t explain observed physical and behavioral traits of living creatures, these physical and behavioral traits are best explained by creationism.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030