As Greedflation Starts to Fade, Wageflation Creeps In
When inflation took off in 2021 in the U.S., so did corporate profits, leading to accusations of “greedflation" and calls in some corners for price controls. This year, Europe is going through the same debate amid soaring food prices. Judging by recent developments, inflation driven by corporations flexing their power to jack up prices more than costs—greedflation, as some called it—is on its way out.
Pretax margins, which widened sharply in 2021 and 2022, were roughly back to prepandemic levels in the first quarter of 2023, according to revised government data released last week. Margins in six of the S&P 500’s 11 sectors were lower in the second quarter than four years earlier, according to FactSet. Narrowing profit margins, though, doesn’t necessarily mean an end to inflation.
Wages are now growing faster than prices. While that doesn’t provoke the same outrage as soaring profits, it’s just as problematic for getting inflation down. The circumstances of 2021 and 2022 made for a seller’s paradise.
As the economy reopened, newly vaccinated consumers rushed to spend pent-up savings and stimulus cash. That demand collided with supply held down by pandemic disruptions and the inability of meeting so much demand with existing capacity. The result: pretax margins shot from 15.6% in the fourth quarter of 2019 to 17.9% in the second quarter of 2021.
That’s based on the Commerce Department’s measure of total value added by corporate businesses. This measure separates total costs into labor, profits, and nonlabor costs such as depreciation, interest and excise taxes, while excluding inputs, such as energy. In the year through the second quarter of 2021, those companies’ prices rose 4.3%.
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