The illusion of ‘greedflation’

Suh Kyoung-ho
The author is an editorial writer of the JoongAng Ilbo.

Companies make an easy scapegoat when the economy is doing poorly. The blame on price gouging by big companies riding on inflation has caught up with Korean authorities. Deputy Prime Minister for Economic Affairs Choo Kyung-ho complained that ramyeon (instant noodle) prices weren’t coming down despite lowered import prices of raw materials. He gently said the government wasn’t meddling, but nevertheless advised consumer rights organizations to raise the issue. Companies instantly got the hint and rushed to cut prices.

Last week, the International Monetary Fund (IMF) also pointed to companies behind the highest inflation in decades. She said that the corporate greed accounts for 45 percent of price rises in the eurozone since the start of 2022. The IMF sided with the position of European Central Bank (ECB) President Christine Lagarde, who has been criticizing some companies for their excessive raising of prices of their products. Lagarde headed the IMF for eight years from 2011 to 2019.

The Economist recently ran an article titled “Greedflation is a nonsense idea.” The U.S. government doled out cash relief checks to households costing more than 25 percent of the U.S. gross domestic product (GDP) during the pandemic period. Despite the overwhelming liquidity, the Federal Reserve belatedly moved to raise the benchmark rate. Prices and corporate profits naturally went up when demand for commodities surged while supplies were constrained from disruptions in global supply chains.

Although Europe did not spend as much as the U.S. on pandemic relief, its subsidy to soaring energy prices cost the region 3.3 percent of the GDP. Despite continuous inflation, the base rate remains low. Prices have spiked on overly-loose liquidity and slow tightening, not because of companies. Authorities have got the cause and effect wrong. The greedflation theory in the U.S. lost ground upon deteriorating corporate profits. The Economist predicted profits of European companies will also fall.

The sticky core price hikes pose as a common worry for central banks in major economies. The headline inflation rate has softened, but the core price, excluding oil and fresh food prices, is still high. In a joint paper dissecting the cause for the pandemic-era inflation, former Fed Chair Ben Bernanke and former IMF chief economist Olivier Blanchard analyzed that increased demand for workers put upward pressure on wages and ultimately prices. They indicated that tightening would have to continue to bring inflation down to the Fed’s 2 percent target and bring the demand and supply of labor into a better balance. Fed Chair Jerome Powell last month agreed that the process of getting inflation back down to 2 percent “has a long way to go and is likely to be bumpy.”

Korea’s headline consumer price index also eased to 2.7 percent in June, the first reading in the 2 percent range in 21 months. But the government cannot let down the guard. If banks in the U.S., Europe, and elsewhere keep raising rates, the Bank of Korea — which froze the base rate for three straight sessions — may have to deliberate its options. The government would have to package its budget for next year under its emphasis to restore fiscal health. Before blaming companies for stoking inflation, authorities must look deeply into their fiscal and monetary policies.

President Yoon Suk Yeol is said to be resembling former conservative businessman-turned-president Lee Myung-bak. Both leaders recruit people they used before and act bossy out of the habits of their CEO or chief prosecutor days. Yoon at least should not repeat the failure of stabilizing prices during the Lee administration. The micro-approach of targeting specific prices instead of taking a macroeconomic approach caused serious side effects.

Prices rise from changes in demand and supply, and the market respond to the changes in prices. The market gains vitality when it responds to prices sensitively. But in Korea, market participants like companies are more sensitive to the government than prices. A government probe was launched after former president Lee indicated his disapproval of high oil prices at gas stations. After that, all refiners rushed to cut prices. Our companies could be competing less with prices out of their habit from responding to verbal interventions from government authorities. The practice of the past continues today under the Yoon administration despite its slogan for the private-led free market economy.