Photo:
Economic indicators tell us inflation is easing, but the prices at the supermarket tell a different story.
Analysts say some corporations are using the recent upheavals to supply chains from the pandemic and spikes in energy prices from the Russian invasion of Ukraine as an excuse to raise prices and keep them high.
Bloomberg financial journalist Tracy Alloway calls it "excuseflation", a term she coined with her Odd Lots podcast co-host Joe Weisenthal.
"The traditional interpretation of inflation, according to most of the economics that has been taught for at least the past few decades, is this idea of supply and demand," she told Afternoons host Jesse Mulligan on Wednesday.
"So if you have a mismatch in capacity and demand, then prices tend to go up. However, what's interesting about our current economic period is we have seen all these new interesting things begin to happen.
"So we had a global pandemic, we had lots of supply disruptions. The entire global economy basically got whacked from this one extreme period in human history. And now we're seeing a lot of economists… start to look at maybe different interpretations of the way inflation works."
New Zealand's official annual inflation rate fell to 6 percent in the second quarter of 2023, well above the 1-3 percent target but down from its peak early last year of 7.3 percent.
But that might come as a surprise to many consumers, with prices at supermarkets and retail continuing to rise - for example, food prices have gone up more than 12 percent, Stats NZ's figures showed, twice the rate of the overall inflation figure.
Alloway said companies have had a lot of excuses to raise prices lately, and if they all do it at once, little reason to bring them down.
"Normally if one company decides, 'I'm gonna start hiking my prices,' you would expect customers to start looking for cheaper alternatives. But if there's a supply disruption or some one-off event that is hitting all the companies within a specific space… think of a company that makes bread or mayonnaise or whatever, if they're all experiencing the same disruption, they can all raise their prices at the exact same time and it becomes very difficult for consumers to find those cheaper alternatives."
Tracy Alloway Photo: Bloomberg media
The term 'greedflation' has been bandied about - the idea that corporations are getting greedy and using the unique circumstances the world finds itself in to extract as much profit as possible.
Alloway said 'excuseflation' is a "more subtle and more nuanced" take on what has been driving prices up.
"I don't think companies got greedier suddenly in the post-pandemic era and decided now is a really good time to start jacking up profits. I think what happened is they saw this opportunity, they saw all the headlines that said shipping costs are going up, it's harder to find workers for factories, the cost of inputs like basic grains or oil or gas are going up, so I have a perfectly valid reason to raise my price and pass some of that cost on to my customers.
"But the big difference again is this idea that everyone can do it at once - so you basically have de facto monopoly pricing power for some of these companies because there just aren't a lot of alternatives for people to turn to.
"If every producer of mayonnaise or bread or whatever is hiking their prices all at once, it's going to be very impossible for customers to go somewhere else, and that is one of the reasons why excuseflation… tends to focus on consumer goods, really basic necessities for people. I think that's where we've seen the strongest pricing power from some of these companies."
But it could only carry on so long, she said.
"The challenge for a lot of companies is if we keep seeing a lot of these pandemic-related disruptions or some of the disruption stemming from Russia and Ukraine, if those start to fade into the background, then people's patience is going to start to wear thin. They're going to think, 'Hold on. You know, the economy is normalising - why does the price of my chicken wings still, why is it still more, you know, than it was before the pandemic?' …
"I suspect as some of these one-off events of the past two or three years begin to fade from our collective memories, there might be more consumer pushback."
She said many economists failed to predict the wave of inflation that has engulfed much of the world because their premise that supply and demand would fix it, failed.
"You can have the theory, but you need to augment it with what people and companies are actually doing, and I don't really see any reason why you should discount what companies themselves are telling you.
"You know, if Pepsi says, 'We are pushing price and we are sacrificing sales volume, but raising our prices because we can,' I think economists should pay attention to that."
During times of high inflation, ideas anathema to most economists - like price controls - start to be put forward.
Alloway said they should not be dismissed outright in times like these.
"You cannot rely on normal market forces to sort out these distortions in prices in abnormal times," she told Afternoons, referencing the work of economist Isabella Weber.
"If you look back at history, for instance, the end of World War II, or, you know, even during World War II, there were price targets because everyone recognised there's this unusual thing going on - maybe we shouldn't allow corporations to ratchet up prices as high as they can just because they have an excuse to do so? … Isabella Weber has also done some very interesting work on sources of inflation and things that kind of cascade through the economy.
"So for instance, she'll point to when the price of natural gas goes up, that tends to be something that in itself causes a wave of price increases because of course, anyone who's making something is probably using energy to do. So, you know, they have to keep the lights and the heating on in their offices.
"So her point is for really sensitive, systemically important sources of inflation, maybe you could limit the market price. You know, it's not like consumers are gonna, you know, opt to not have any heating at all this winter and just turn off the taps - they have to get it from somewhere.
"And if the companies, the energy suppliers have de facto monopoly pricing power because all these things are happening in the world and they can say, well, you know, what are we gonna do? 'Russia invaded Ukraine. There's no gas, we have to raise our prices.' Maybe it makes sense for something like that to try to limit the amount of price increase that they can actually do.
"And that would in and of itself also have the effect of dampening inflation elsewhere since it would maybe limit input costs for a wide variety of companies."
