As Greedflation Starts to Fade, Wageflation Creeps In

When inflation took off in 2021 in the U.S., so did corporate profits, leading to accusations of “greedflation” and calls in some corners for price controls. This year, Europe is going through the same debate amid soaring food prices.

Judging by recent developments, inflation driven by corporations flexing their power to jack up prices more than costs—greedflation, as some called it—is on its way out. Pretax margins, which widened sharply in 2021 and 2022, were roughly back to pre pandemic levels in the first quarter of 2023, according to revised government data released last week. Margins in six of the S&P 500’s 11 sectors were lower in the second quarter than four years earlier, according to FactSet.

Narrowing profit margins, though, doesn’t necessarily mean an end to inflation. Wages are now growing faster than prices. While that doesn’t provoke the same outrage as soaring profits, it’s just as problematic for getting inflation down.

The circumstances of 2021 and 2022 made for a seller’s paradise. As the economy reopened, newly vaccinated consumers rushed to spend pent-up savings and stimulus cash. That demand collided with supply held down by pandemic disruptions and the inability of meeting so much demand with existing capacity.

The result: pretax margins shot from 15.6% in the fourth quarter of 2019 to 17.9% in the second quarter of 2021. That’s based on the Commerce Department’s measure of total value added by corporate businesses. This measure separates total costs into labor, profits, and non labour costs such as depreciation, interest and excise taxes, while excluding inputs, such as energy.

In the year through the second quarter of 2021, those companies’ prices rose 4.3%. At the same time, the cost of labour per unit of output fell 2.3%, because though wages were rising in that time, output per worker (productivity) was rising faster. Profit per unit of output rose a whopping 40%.

Greedflation is a catchy phrase, but not of much analytical value. Businesses always set prices to maximise profits. Raising them too much risks competitors ramping up supply to take market share.

But in 2021 and most of 2022 many companies couldn’t expand supply because of shortages of materials, labour or transport capacity. In the past when demand for vehicles rose, manufacturers effortlessly boosted output. This time, a shortage of semiconductors curtailed production and manufacturers responded to strong demand by slashing incentives and raising prices. General Motors sold fewer vehicles in both 2021 and 2022 than in 2019 but in both years made about 50% more profit. Companies weren’t the only beneficiaries: so was anyone with a used car to sell.

While greed is timeless, companies conceivably may have more power to translate greed into prices because of declining competition. The Biden administration, for example, blamed soaring meat prices in part on consolidation among meatpackers. But that wouldn’t have translated into such high prices without so much demand from locked-down consumers and the industry enduring production interruptions and labour shortages due to Covid-19, drought, avian flu and shrunken herds.

In recent quarters demand has softened. Adjusted for inflation, consumer spending was flat in three of the past four months. Tyson Foods lost money in the second quarter as soft demand pulled down prices for pork and beef while feed and labour expenses rose.

Supply, meanwhile, seems to be improving, at least for goods. In a report this week, economists at Goldman Sachs said global shipments of automotive semiconductor chips and U.S. auto production in the past few months are finally above pre pandemic levels. As a result, automotive inventories and incentives are both on the rise. In May the average new car buyer paid $410 below sticker price, compared with $637 above a year earlier, according to Cox Automotive.

Demand for services is holding up better than for goods, and services supply is still constrained, in particular by labour shortages. One reason air travel is so expensive is that airline capacity this year is about 14% below pre pandemic trend levels, Delta Air Lines recently told shareholders.

As airlines add flights they stretch staff, aircraft and air-traffic controllers to capacity, leaving them vulnerable to the slightest disruption. After thunderstorms triggered hundreds of flight cancellations in recent weeks, United Airlines said it might reduce flights out of its Newark, N.J. hub to create a buffer.

Airlines also reflect a broader reality: Whatever pricing power business still commands is increasingly eaten up by labor costs. Pilot shortages caused by pandemic retirements have given unions bargaining leverage, with many seeking to replicate a 34%, four-year increase Delta gave its pilots this year.

Workers are slowly recapturing more of the economic pie. In the first quarter of 2023, wages and salaries rose to 49.3% of corporate value added, higher than in 2019. Labor costs per unit of sales rose 6% in the year through the first quarter, ahead of prices, which were up 5.3% in the same period. Profits per unit of output rose just 1.6%.

The trend of wages rising faster than prices has continued in recent months. That’s welcome relief for workers but poses a set of difficult tradeoffs: Either profit margins will have to narrow further, which businesses will resist; high inflation will have to continue, which the Federal Reserve is fighting; or productivity will have to boom, of which there is no sign yet. If none of those things happen, then wageflation, like greedflation, will have to go away.

Former New Hampshire Gov. Chris Sununu delivered a warning to Treasury Secretary Scott Bessent during a recent visit to Washington: Already-high airfares will surge if the war in Iran doesn’t end soon.

Sununu, a Republican who represents some of the biggest airlines as president of the industry group Airlines for America, has for weeks sounded the alarm to Trump administration officials about the economic fallout from high jet fuel prices. The war, Sununu has argued, must come to a close soon, or things will get worse.

Administration officials have gotten the message.

Privately, President Trump’s advisers are increasingly worried that Republicans will pay a political price for the rising fuel costs, according to people familiar with the matter. Many of those advisers are eager to end the war, hoping prices will begin to moderate before November’s midterm elections.

The fallout from the U.S.-Israeli attack in late February has slowed traffic through the Strait of Hormuz, a vital shipping lane, triggering a sharp increase in oil, gasoline and jet-fuel prices.

That means consumers are grappling with high costs ahead of the summer travel season, as they consider vacation plans.

Sixty-three per cent of Americans said they put a great deal or a good amount of blame on Trump for the increase in gas prices, according to a new poll conducted by NPR, PBS and Marist.

More than 8 in 10 Americans said struggles at the gas pump are putting strain on their finances.

Jet-fuel prices roughly doubled in a matter of weeks after the war began, and they have remained high. Airlines have said that will add billions of dollars of additional expenses this year, squeezing profit margins.

U.S. airlines spent more than $5 billion on fuel in March—up 30% from a year earlier, according to government data.

Carriers have been raising ticket prices, hoping to pass the cost along to consumers, and they are culling flights that will no longer make money at higher price levels.

In March, the price of a U.S. domestic round-trip economy ticket rose 21% from a year earlier to $570, according to Airlines Reporting Corp., which tracks travel-agency sales.

So far, airlines have said the higher fares haven’t deterred bookings and they are hoping to recoup more of the fuel-cost increases as the year goes on.

Earlier this week, Trump said the current price of oil is “a very small price to pay for getting rid of a nuclear weapon from people that are really mentally deranged.”

Secretary of State Marco Rubio told reporters that if Iran got a nuclear weapon, the country would have more leverage to keep the strait closed and “make our gas prices like $9 a gallon or $8 a gallon.”

Trump has taken steps in recent days to bring the war to an end. Late Tuesday, the president paused a plan to help guide trapped commercial ships out of the Strait of Hormuz, expressing optimism that a deal could be reached with Iran to end the conflict.

Crude oil prices fell below $100 a barrel on Wednesday, after reports that Iran and the U.S. are working with mediators on a one-page framework to restart negotiations aimed at ending the conflict and opening the strait.

Sununu said Trump administration officials are conscious of the economic fallout from the war: “They get it…and I think that’s why they’re trying to get through the war as fast as they can.”

But he cautioned that it could take months for prices to return to prewar levels.

“Ticket prices won’t go down immediately” after the strait is fully reopened, Sununu said. “You’re looking at elevated ticket prices through the summer and fall because it takes a while for the prices to go down.”

Since the initial U.S.-Israeli attack in late February, Sununu has met in Washington with National Economic Council Director Kevin Hassett, representatives from the Transportation Department and senior White House officials.

A White House official confirmed that Hassett and Sununu have discussed the effect of increased fuel prices on the airline industry. The official said the conversation touched on how the industry can mitigate the impact of high jet fuel prices on consumers.

“The president and his entire energy team anticipated these short-term disruptions to the global energy markets from Operation Epic Fury and had a plan prepared to mitigate these disruptions,” White House spokeswoman Taylor Rogers said, pointing to the administration’s decision to waive a century-old shipping law in a bid to lower the cost of moving oil.

Rogers said the administration is working with industry representatives to “address their concerns, explore potential actions, and inform the president’s policy decisions.”

A Treasury Department spokesman pointed to Bessent’s recent comments on Fox News that the U.S. economy remains strong despite price increases. The spokesman said Treasury officials have met with airline executives, who have reaffirmed strong ticket bookings.

“We’re cognizant that this short-term move up in prices is affecting the American people, but I am also confident, on the other side of this, prices will come down very quickly,” Bessent told Fox News on Monday.

The war has already contributed to one casualty in the industry: Spirit Airlines. Company representatives have said they were forced to close the airline because the sustained surge in jet-fuel prices derailed the company’s plan to emerge from chapter 11 bankruptcy.

The Trump administration and Spirit failed to come to an agreement for the company to receive a financial lifeline of as much as $500 million from the federal government.

Transportation Secretary Sean Duffy has argued that the Iran war wasn’t the cause of Spirit’s demise, pointing to the company’s past financial struggles, as well as the Biden administration’s decision to challenge a merger with JetBlue.

Other budget airlines have also turned to the federal government for help since the U.S.-Israeli attack. A group of budget airlines last month sought $2.5 billion in financial assistance to offset higher fuel costs, and they separately wrote to lawmakers asking for relief from certain ticket taxes.

As Greedflation Starts to Fade, Wageflation Creeps In

Softer demand, more supply and rising labor costs all take the air out of profit margins

Administration officials have spoken to the airline industry, which has voiced concerns about the rising costs.