Han Dieperink: Greedflation 2.0
This column was originally written in Dutch. This is an English translation.
By Han Dieperink, written in a personal capacity
More than two years ago, greedflation was seen as a temporary phenomenon. The reasoning was straightforward: once inflation normalised, the cover under which companies could raise prices excessively would disappear. In an environment of 2% inflation, any company implementing 10% price increases on its own would lose market share. This market discipline was expected to put an end to greedflation. That may be true, but the story appears to have taken a new turn.
Interest in ‘greedflation’ has now all but disappeared. A search on Google Trends shows that interest in the term follows almost exactly the same pattern as inflation itself: a sharp peak in 2022–2023, followed by an equally sharp decline. This waning interest is understandable, but also risky. Because it is precisely now, when consumers are no longer paying attention, that there is scope for what you might call ‘greedflation 2.0’. Not the brutal price hikes of the inflationary wave, but the quiet failure to pass on falling input costs.
Camouflage
The original ‘greedflation’ narrative revolved around camouflage. When consumers already expect everything to become more expensive, individual companies can raise their prices slightly more than strictly necessary without anyone noticing. Supply shocks in one sector can act as a tacit coordination mechanism. When oil prices skyrocket, not only do energy costs rise, but so do margins in related sectors, without any explicit coordination. The price signal replaces the cartel.
But there is a downside. When the wholesale price of diesel rose sharply, the retail price rose much less. Margins therefore became smaller, not larger, exactly the opposite of what the ‘greedflation’ narrative predicts. The explanation is that consumers become much more active in comparing prices when prices rise. Search traffic on price comparison sites increased dramatically, and in regions where that search behaviour was strongest, margins remained under the most pressure.
Rocket and spring
This ties in with a theory known as asymmetric pricing, also referred to as the rocket and spring phenomenon. Prices at the pump shoot up like a rocket when oil becomes more expensive, but fall like a spring when the oil price drops. Consumers search more when prices rise, even though there is little to be gained, as all suppliers charge roughly the same. When prices fall, however, greater price differences emerge between suppliers, but most consumers no longer bother. The search strategy is intuitive: if the price has risen, you drive on in the hope of finding something cheaper; if the price has fallen, you stop contentedly and fill up.
Sam Peltzman of the University of Chicago documented this pattern on a much larger scale as early as 2000. In his study ‘Prices Rise Faster Than They Fall’, he analysed hundreds of product markets and concluded that in more than two out of three cases, prices rose faster in response to cost increases than they fell in response to cost reductions. The spring effect is universal.
Subtly falling input costs
This brings us to the heart of ‘greedflation 2.0’. It is often assumed that grabflation disappears as soon as inflation normalises, because companies can then no longer operate under the radar. That is correct for the gross variant: the price increases on top of cost inflation. But the more subtle variant works exactly the opposite way. The real margin improvement does not occur when inflation is high and everyone is watching, but when inflation normalises and attention wanes. Input costs fall, but consumer prices do not follow, or hardly at all. The difference quietly disappears into the profit margin.
This works particularly well within an oligopoly. Within an oligopoly, competitors keep a close eye on one another, but that vigilance is focused on not undermining the status quo, not on passing on cost reductions to the consumer. The signal is not ‘raise your price’, but ‘do not lower your price’. This is relevant for investors. Companies with strong market positions and low price transparency can structurally improve their margins in an environment of falling input costs without this leading to public resistance. This translates into profit growth that is not driven by volume or innovation, but simply by not passing on cost reductions. It is a source of returns that is rarely explicitly identified in analyst models, but which can be substantial in practice. It reaffirms that shares offer good protection against inflation. Not only on the way up, but also on the way down.
At the same time, this is a vulnerability. Whether one believes that companies abuse their market power under the guise of high inflation, or precisely when inflation is low and consumers are not paying attention, in both cases the case for stricter competition policy is equally strong. Breaking up dominant positions and increasing price transparency remain the most effective tools, as I argued earlier. Sectors currently benefiting from the springboard effect run the risk of becoming the next targets of regulation.
With wholesale prices in the United States having risen sharply recently (to 6% year-on-year in April), the debate on ‘greedflation’ will undoubtedly flare up again. That is fine, but the real lesson is broader. It is not when everyone is talking about ‘greedflation’ that consumers and investors need to be most alert. It is when nobody is talking about it anymore.