Thread by @PDonovan_econ

Profit-led inflation (#greedflation or #excuseflation) is the third inflation wave since the pandemic. It is starting to attract increased media attention, which could well be its undoing. So what is it, how widespread is it, and what can be done? A🧵

Profit-led inflation is not a demand surge allowing higher margins. Profit-led inflation occurs when companies spin a fairy tale to persuade people profit margin expansion is "fair" - the price elasticity of demand is lowered. Prices up with stable demand.

https://twitter.com/UBS/status/1640671540273446919?s=20

This is very different from the demand-led transitory inflation of 2021 (everyone rushing to buy flat screen TVs), or the energy supply shock inflation of March 2022. But this has been around for a while, and was the main inflation driver late Q3/early Q4
ft.com/content/837c38…

Small companies also do this. The grandma at a local family-run restaurant will price gouge alongside the national chain. What matters is being able to convincingly blame an external shock, and being able to say "everyone else is doing it" @Louis_Ashworth
ft.com/content/ced099…

Not every sector will do this. Stable demand and a clear scapegoat are needed. This is why margin expansion has been easier in the food sector. US eggs trading at prices similar to crack cocaine? Is it Avian 'flu, or is it margin expansion? @derek_saul
forbes.com/sites/dereksau…

Telling a deceptively simple story matters to this inflation. It avoids customer blame . Social media and sensationalisation of stories like "supply chain crisis" or "harvest failure" may have made profit-led inflation easier. @tracyalloway @TheStalwart bloomberg.com/news/articles/…

This is all about justifiably passing on cost increases, and then using consumer naivety about the relative importance of those cost increases to expand margin. See, for instance, the explosion in the mark-up on a pint of milk in the UK. @phillipinman theguardian.com/business/2023/…

So, how to stop it? Profit-led inflation depends on 1) stable demand, and 2) consumers' belief in the story. Rate hikes do slow demand and reduce this inflation, but it is an unnecessarily destructive way of bringing this about.
@NicoleGoodkind
edition.cnn.com/2023/03/29/inv…

More effective is attacking inflation through the second condition - stop consumers' believing the increases are justified. Loss of consumer loyalty is expensive. @SamRo tker.co/p/profit-margi…

Social media may defeat this inflation. If economists could demonstrate profit-led inflation in a TikTok dance, this could all be over... other tools are available. Searching online for cheaper prices, one star reviews for "value for money" on rating sites, or outright boycotts.

Congratulations for having made it this far. Here endeth the thread. Though it would be remiss of me not to note that "The Truth About Inflation" is being retailed at practically the same price as when first published in 2015 (royalties go to charity)
amazon.co.uk/Truth-About-In…