Editorial: Greedflation and price-gouging - why we need to share the inflation pain

Businesses shouldn't automatically assume they can maintain their margins during rampant inflation. Photo / Valentin Russanov, Getty Images

Editorial

EDITORIAL

Greedflation has an ugly ring to it. Let's hope we're not going to see any of it in this country.

It's the term coined in the US for companies using the cover of inflation to boost their margins - effectively price-gouging.

In May, the US Congress passed a new price-gouging bill targeting petrol companies.

Now there is talk of going further to look at other sectors.

It has quickly become a hot political issue there, with some accusing the Democrats of seeking to deflect attention from themselves towards big business.

But a study released last month by Mike Konczal, an economist at the Roosevelt Institute, showed that US corporate profit margins have increased from a long-run average of 5 per cent to around 10 per cent in the past two years.

In other words, there are companies profiteering from the pandemic and its inflationary aftermath.

Across the US, Europe and the UK there is now talk about "windfall taxes" for companies that are seen to unduly profit from the pandemic.

In New Zealand, petrol companies, supermarkets and building supply companies are already in the spotlight - largely for broader structural reasons due to lack of competition.

Banks too should be on notice.

Business Financial Data from StatsNZ shows the level of profit booked by these sectors has seen some exceptional increases in profits.

One would hope that extra scrutiny will deter any unreasonable price-hiking in this inflationary environment.

Everybody can understand the need for businesses to raise their prices as costs rise.

Business creates jobs, and low unemployment is about the only economic statistic we having going for us right now.

It's easy for consumers to blame retailers, at the end-point of the supply chain, for the rising cost of living.

Many small businesses simply have no choice but to pass through costs. They risk going under if they don't.

So we should be wary of knee-jerk reactions to a complex issue.

But inflation is making everyone a little bit poorer. Most workers are losing purchasing power as wages fail to keep up with price rises.

Businesses shouldn't automatically assume they can maintain their margins.

And they certainly shouldn't be using inflation as an excuse to boost them - even if they are in the fortunate market position of being able to.

Where price increases are unavoidable, there should be an onus on companies to deliver them in a responsible manner that minimises inflationary fallout.

Announcing price rises via press release to grab media headlines allows companies to justify their moves and mitigate the outcry from customers. But in making a song and dance, companies risk entrenching inflationary expectations in the business community and with consumers. The expectation of higher inflation can quickly become self-fulfilling.

This is about social responsibility and self-interest.

It should be obvious to businesses that the longer inflation runs, the worse it is for their long-term outlook.

Large corporates especially should have the capacity to absorb more of the inflation shock.

That means shareholders and boards understanding that this is not the year for record profits.