“Greedflation” is a nonsense idea

livemint.com:

inflation: that it is driven by fast-growing wages. Central bankers live in fear of wage-price spirals. Last year Andrew Bailey, governor of the Bank of England, asked workers to “think and reflect" before asking for pay rises.

The remark was incendiary because the inflation that has troubled the rich world since 2021 has largely left workers worse off. Wages have not driven prices up but lagged behind them. Yet to argue that companies must therefore be to blame is to confuse cause and effect.

In America the profit margins of non-financial corporations surged after vast fiscal stimulus during the pandemic, which amounted to more than 25% of GDP and included three rounds of cheques sent directly to most households. The infusion of cash into the economy—which the Federal Reserve chose not to offset with higher interest rates—set off a consumer-spending boom that overwhelmed the world’s covid-strained supply chains, disrupting other economies. With too much cash chasing too few goods, it was inevitable that companies would make more money.

Then, after Russia invaded Ukraine, companies producing energy or food also found themselves selling into a shortage. Their prices and profits shot up. Europe’s economy has not overheated as quickly or to the same extent as America’s.

But the euro zone has recently spent 3.3% of GDP subsidising energy bills and its interest rates are still too low given the underlying rate of inflation. Today it is displaying familiar symptoms: high core inflation, high profits and wages that are surging in a tight labour market. It seems likely that profit margins there will also follow America’s downwards; analysts expect the profits of listed companies to decline this year.