Is ‘greedflation’ behind your soaring grocery bills?

With prices seeming to increase every time you visit the shops, it’s natural to wonder whether retailers are using the climate of inflation as cover to ratchet up their prices. The idea has even been given its own fancy term: greedflation.

Inflation, currently sitting at 8.7% as of May 2023, is having an impact on everybody through higher prices. But there are knock-on effects, with the Bank of England raising the base rate of interest to 5% to try and combat inflation, meaning those on tracker mortgages face increased payments.

The narrative has long been that wage rises, along with high energy prices, are fuelling inflation. As thousands continue striking for better wages, government ministers are insisting meeting those demands would make inflation worse. Bank of England governor Andrew Bailey has said “unsustainable” pay rises are stoking inflation, and told employees to show restraint in their demands for a pay rise.

But new evidence shows another side of the story. Is greedflation partly to blame for rising prices?

Even the Bank of England and the IMF are now admitting retailers are making higher profits as they raise prices in shops by more than their costs are increasing.

As Bailey put it in a letter to Jeremy Hunt: “The continued pass-through of costs to consumer prices may also be indicative of some rebuilding of profit margins by retailers”. 

Or in simpler terms, a significant chunk of the pain we’re seeing at the supermarket is from retailers hoping to make bigger profits.

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Research backs this up: the Unite trade union found in March that profit margins rose from 5.7% to 10.7% between 2019 and 2022. Bailey had previously said he had no evidence that companies were profiteering, but that they needed to show restraint on prices regardless.

This all adds to a growing argument against the “wage-price spiral” narrative, which the UK government has used as a key reason to turn down the pay demands of striking workers. Where once it was just trade unions, now international institutions are pointing the finger at businesses and raising the spectre of greedflation.

The IMF has said corporate profits are the biggest driver of inflation in Europe, while in the UK pay rises for the top 10% of earners have been driving price rises. 

Christine Lagarde, the president of the European Central Bank, said interest rates and inflation would remain high if firms don’t start accepting lower profits.

Meanwhile, the idea of wages driving inflation has been questioned by economists. The government only has control over public sector wages – and these only account for one in five workers, said Henry Parkes, a senior economist at IPPR. 

“Furthermore, in other areas demand is actively being sucked out of the economy through the highest interest rates since 2004, whilst the Bank of England found that investment intentions are plummeting,” Parkes added.

So what’s to be done? Responding to Bailey, Chancellor Jeremy Hunt said he will meet with regulators to make sure the falling cost of production is passed on to shoppers in the same way profits have been. Over to you, supermarkets.

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