What’s really driving inflation? Fed policies or greedflation?

There’s heavy debate on where inflation is coming from. Is it the massive increase in money supply, rising wage and input costs or greedflation? (Greed what? We’ll explain).

They thought we wouldn’t notice…

Typically, rising prices would lead to lower demand. But in recent years, product shortages have kept demand strong. This leads us to greedflation — when companies raise prices faster than inflation… because they can.

Corporate earnings are at their highest in 70 years — despite growing labor and material costs.

• Corporate earnings as a percentage of GDP has risen from 10.4% in the ‘90s to 12.4% this year.
• Between 1979-2019, corporate earnings contributed 11.4% to price increases. Today, it’s over 50%.

As an investor, you want to buy into profitable companies — but then you look at your ridiculously high grocery and utility bills. Conflicting innit?

This economist disagrees with the Fed

Paul Donovan, the Chief Economist of UBS Global Wealth Management, argues that Jerome Powell has no idea how rising rates will calm inflation.

Instead, the growth of corporate earnings is what’s driving inflation:

• Strong demand has “given companies the confidence to raise prices faster than costs.”
• “The power of storytelling has conditioned consumers to accept price rises.”

He looks at restaurant and hotel prices where wage costs (adjusted for increasing productivity) are up 5-6%, yet prices have gone up 16%. Restaurants are paying fewer people to work harder.

What does all this mean?

This December, the Fed has a difficult decision to make as more economists and analysts come out against rate hikes. Barry Ritholtz of Ritholtz Wealth Management argues:

• If corporate earnings drive inflation, raising rates won’t incentivize companies to lower margins.
• “Unless the Fed figures this out soon, they are going to do real damage to the U.S. economy.”

In September, economist Jeremy Siegel blasted the Fed for raising rates too late — and now they’re being too aggressive. Destroying demand by increasing rates would likely bring inflation down — but is it necessary?