WE HAVE BEEN hearing more and more talk of price gouging – or ‘greedflation’ – as a driver of rising prices since the Covid-19 pandemic. What does the latest data say?
From its mid-summer peak last year, headline inflation has been slowing through the first four months of 2023. But, prices are still high and rising faster than any of us can be comfortable with. At more than 13%, the rate of increase in prices consumers pay for basic foodstuffs is nearly double the headline rate. Even before the latest surge, Ireland already had the third highest food prices in the EU.
But, food commodity prices on international markets have been falling steadily since hitting an all-time high in March 2022, just after Russia invaded Ukraine. Further down the supply chain, the prices charged by the producers of food products in Ireland have been falling since peaking in October 2022. So, if producer prices are falling while consumer prices continue to rise, then it stands to reason that profit margins are increasing for the middleman.
If we zoom out and take a look at the economy as a whole – using the CSO’s quarterly national accounts up to Q1 2023, published last Friday – we can see the role that profiteering played over the course of 2022, as well as some early signs of improvement in the first three months of 2023.
Roughly speaking, the wealth – or ‘value added’, after accounting for what economists call ‘intermediate inputs’ – generated in an economy has two possible destinations: to workers as wages or to businesses as profits.
So, by looking at how gains from economy-wide price increases are divided between wages and profits, we can identify the main driver of inflation at any given time. Across the economy as a whole, increased profits contributed about three times as much to inflation as wage increases in the 12 months to the end of March 2023.
Let’s zoom in on one sector in particular: wholesale, retail, hotels and restaurants together make up the economic sector in which consumers spend much of their discretionary income. Whether it’s the price of a pint, petrol at the pump or the weekly shop, they’re also prices we pay close attention to.
In the 12 months to end-March 2023, essentially all of the inflation in this consumer-facing sector can be explained by increased profits since the contribution of wage increases during the final nine months of 2022 was wiped out by their negative contribution in the first three months of 2023.
The good news is that prices appear to have eased in this sector in Q1 2023, driven by the even more negative contribution of profits than of wages during the period.
We need to be careful about reading too much into a single quarter’s data, particularly since the most recent quarters are those most subject to revision, but it does suggest that post-pandemic profiteering in consumer-facing sectors may begin to unwind as economic activity slows.
While central bankers are good at identifying the causes of inflation, they only have a limited number of tools to tackle it. Chief among these is the interest rate. But, this is more sledgehammer than scalpel. By increasing the cost of money, central banks reduce demand in the economy. Of course, this will lead to falling profit margins as consumers become unwilling or unable to pay higher prices for goods and services.
But, less spending and investment in the economy also means fewer jobs and lower wages than would otherwise be the case. This is a feature, not a bug, of using monetary policy to target inflation.
Besides, fluctuating demand does nothing to shape the rules of the game over the longer term. For this, there is a need for meaningful competition between providers of goods and services as well as transparency around prices that help consumers to ‘shop around’. As well as beefing up our Competition and Consumer Protection Commission, there is also a role to be played by the government and its agencies in promoting radical transparency when it comes to both prices and profits.
For example, we already require pubs, restaurants, petrol stations, hairdressers, dentists and others to display prices prominently on their premises. There’s no reason we couldn’t require supermarkets to do the same, by publishing weekly the prices of the top 50 grocery goods.
Businesses could also be obliged to disclose their profit margins in the Irish market, so that multinational retail outlets, for example, can’t hide the super-sized profit margins they are charging in Ireland by aggregating them with profits earned in a larger jurisdiction, such as the UK.
There have already been calls to introduce price controls on supermarket staples, using powers the government has under the Consumer Protection Act 2007. I can understand why the government would be reticent to go down that route, but they need to use every other arrow in their quiver so that their hand is not forced.
A first step could be the introduction of voluntary price caps by agreement with major retailers, as is under consideration by the Conservative government in the UK and already operating in France.
Victor Duggan is an economist.
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