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FOR Comment 1/2023: How greed did not drive the inflation


Why are prices rising? Because someone raises them. Why do they raise them? Because they are greedy. And who sets the prices? Entrepreneurs. This is the brief presentation of the “greed-based” theory of inflation, which has been gaining popularity among hostile to business, left-leaning econo-mists and journalists. A well-expressed advocate of this theory is also the president of the National Bank of Poland, who uses the argument that recent price increases are due to greed, backs it up by a personal study of allegedly inflated prices of butter by retail chains.​

However, this theory has one fundamental flaw – it doesn’t explain why inflation suddenly soared in the second half of 2021 to the levels unseen in developed economies for decades. Were entrepre-neurs less greedy before? It’s hard to believe – after all, philosophers, priests, and moralists have been warning of the dire consequences of unrestrained greed since ancient times. So why did prices rose slower just a few years ago, and why do they sometimes not rise at all or even fall?

Because entrepreneurs are restrained in raising prices by the greed of consumers. Entrepreneurs are not a group characterized by extraordinary greed compared to others – it’s the same greed that drives an employee who asks for a raise in a company or changes job when they get a better-paid offer. The same greed drives a customer who refrains from making a purchase altogether due to a too high price or looks for a store where he can buy the item cheaper.

To make it possible for business’ owners to increase prices, the demand or supply circumstances must shift. This has happened lately for two main reasons: firstly, the monetary and fiscal authorities have implemented extensive policy relaxations, and secondly, Russia’s aggression against Ukraine has led to a surge in fuel and energy costs.1

Contrary to what its proponents claim, the “greedflation” hypothesis (inflation resulting from greed) has not been scientifically confirmed in a recent analysis by economists from the International Mone-tary Fund2, which shows that in 2022, 45% of the consumption deflator (one of the indicators of price level changes) in the euro zone was “attributed” to companies’ profits. This analysis does not indicate that profits are causing rapid price growth recently.

The full content of the publication can be found in the file to download below.

Contact to authors:

Marcin Zieliński, FOR president & chief economist
[email protected]

Zofia Kościk, FOR junior economist analyst
[email protected]

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