We hear a lot about the rise in inflation — that prices are going up across the board. Inflation in Canada is currently at 6.3%, at 6.5% in the U.S. Inflation is caused when demand outstrips supply.
The war in Ukraine and the pandemic have fueled the current global inflationary environment. When there is a supply shortage, it is harder for companies to provide goods and services at the same price.
As a result, most companies pass on the increased cost of production to their customers in terms of increasing their prices. This has been happening across the board. But it appears that some companies may be raising prices more to cover the higher cost of producing those goods.
“Greedflation” describes a situation where businesses raise prices over and above the inflation rate to make a bigger profit. For example, while inflation in Canada is at 6.3%, food prices, on the other hand, have increased by more than 11%.
A Case of “Greedflation”
The graph below shows corporate profits after tax with IVA and CCAdj (unit profits from current production); profit margins skyrocketed during the pandemic and continue to do so.
Shaded areas indicate U.S. recessions. Source: U.S. Bureau of Economic Analysis (for public use)
It appears that during inflation, companies may find it an opportune time to take advantage of rising prices and charge more than what it costs them to make their products.
Pricing Strategy at Work
This is a strategy echoed by a professor of marketing at the Wharton School at the University of Pennsylvania, Z. John Zhang, who has studied pricing strategy and said,
“In the inflationary environment, everybody knows that prices are increasing. Obviously, that’s a great opportunity for every firm to realign their prices as much as they can. You’re not going to have an opportunity again like this for a long time.”
Undoubtedly, the stimulus checks governments provided during the pandemic are partly to blame for inflation. But in addition, the war in Ukraine and the lockdowns in China are some of the reasons to have caused a bottleneck in supplies, causing prices to go up.
And the fundamental law of demand and supply dictates that one way to deal with a shortfall in demand is to raise prices. And the people who can afford it get the goods.
What Can You Do?
Because money talks, why don’t consumers say something with their wallets? Be discriminating. Cut down your spending on non-essentials. Learn how to squeeze every dollar you earn. Having lesser money does not have to rob your quality of life. Many of the best things in life are free. Enjoy things that cost nothing but are priceless, such as going for a walk with a friend.
Look at your budget closely and eliminate what you don’t need. Don’t allow your life to be dictated by consumerism but use your money in a way that aligns with your values.
There are countless ways you can improve your finances in this inflationary environment. Make it a catalyst for changing your financial habits and keep more in your pockets regardless of what is happening globally.
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