Debunking Biden’s “Greedflation” Claim: The Fed Reveals The True Drivers Of Inflation
Story by Danielle Shockey
As the US economy continues to grapple with persistently high inflation, President Biden has repeatedly blamed "corporate greed" as the primary culprit.
The administration has accused companies of engaging in "greedflation" and "shrinkflation" - raising prices and reducing product sizes to maximize profits at the expense of consumers.
However, a recent report from the Federal Reserve Bank of San Francisco challenges this narrative, providing a more nuanced and evidence-based understanding of the factors driving the current inflationary pressures.
The Federal Reserve Bank of San Francisco's research shows that while there has been an increase in markups (the difference between a product's selling price and its production cost) in select industries like motor vehicles, the overall markup rate has remained largely in line with previous economic recoveries. Contrary to Biden's claims, the data suggests that fluctuations in corporate markups have not been a driving force behind the ups and downs of inflation during the post-pandemic recovery.
The report attributes the current inflationary pressures to other factors, such as the massive government stimulus spending and the Federal Reserve's low-interest-rate policies during the COVID-19 pandemic. These measures boosted consumer demand at a time when the economy was experiencing supply chain disruptions and shortages, leading to a sharp rise in prices across various sectors.
While corporate profits did spike during the economic recovery, the Fed's analysis indicates that this is not unusual compared to previous recoveries, such as the Great Recession. The increase in profits is largely attributable to pandemic-era subsidies and lower business taxes, rather than a deliberate effort to exploit consumers through "greedflation."
The report emphasizes that aggregate markups - which are more relevant for overall inflation - have generally remained flat, in line with previous economic recoveries over the past three decades. This suggests that markup fluctuations have not been a primary driver of the recent inflationary trends.
Many economists, including those at the Federal Reserve, have pointed to high levels of government deficit spending as a significant contributor to persistent inflation. The Biden administration's $1.9 trillion American Rescue Plan and $750 billion Inflation Reduction Act have further expanded the national debt, which has increased by nearly $6.8 trillion under Biden's presidency.
The producer price index, which tracks inflation for businesses before it reaches consumers, has risen 18.6% since Biden took office in January 2021 - roughly the same as consumer inflation. The prices for commodities used as inputs for manufacturing have also experienced significant spikes, reflecting the broader inflationary pressures faced by businesses.
While the administration has highlighted "shrinkflation" - the practice of reducing product sizes while keeping prices the same - as a way companies are "charging more for less," this is often a response to rapid inflation that has increased businesses' own costs. Companies may resort to shrinkflation to raise prices in line with inflation without losing price-sensitive customers.
The Fed's research underscores the need for a more nuanced and evidence-based approach to addressing inflation, rather than relying on simplistic narratives of "corporate greed." Policymakers should focus on addressing the root causes of inflation, such as the imbalance between supply and demand, rather than solely targeting the pricing decisions of corporations.
As the debate over the drivers of inflation continues, it is crucial that policymakers and the public rely on rigorous, data-driven analysis from trusted institutions like the Federal Reserve. Dismissing or downplaying such objective research in favor of political rhetoric risks undermining the credibility of economic policymaking and undermining efforts to tackle the complex challenges facing the economy.
Especially during an election year.
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Debunking Biden’s “Greedflation” Claim: The Fed Reveals
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