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Inflation or Corporate Greed?
We’re thankful for the great reception to our last episode of Money Matters. That episode highlighted Chick-Fil-A points to teach a basic understanding of how the money supply affects inflation. One listener asked whether corporate greed has been a significant contributor to the return of inflation. The answer is yes and no. Let’s unpack this a bit more. It is true that corporations raise prices when they think they can do so without significantly impacting demand for their product or services. We are seeing this more particularly in streaming services as they increase the rate for their ad free version. But let’s talk about whether this is greedy or not. In your current job, do you have a have a desire to increase your own salary? Most everyone will probably answer yes. Is that greedy? Well, it certainly can be. Individuals and corporations alike can be in love with money and turn greedy to make more and more and more of it. But the desire to increase profit itself is not categorically greedy. Otherwise, you should never desire a raise. And for corporations, part of the increased profits from increased prices often go to pay for increases in wages to their employees. So even if we can’t dismiss all price increases as driven by greed, there does need to be some kind of check to those corporations who do find themselves motivated to make more money at all costs.
I would argue that the biggest check to corporate greed is a competitive market rather than some kind of government solutions. Many times we look to the government to solve our problems, and when it comes to those corporations that are overtaken by a desire to increase profits without any benefit to the end customer or teammates, what is going to keep them in check? Well, I believe it is a competitive market. Corporations do not have pricing power if there are other companies in that same sector who stand to gain business from their price increases. Let’s look at an example from the fast-food sector. If McDonald’s raises the price of their hamburgers, you’ll have to make a decision on whether you’ll pay a little more for the quality of a Big Mac, or whether a cheaper Whopper at Burger King will be just as good. The competitive landscape of the fast-food industry means that there is always a cheaper alternative somewhere. So if you see prices going up across the board for fast food, their costs must really be going up. Otherwise, one of the fast-food franchises would keep their prices low so they could grab market share. In the case of a competitive sector, competitors keep one another in check – because if one company makes a greedy move, their competitors are ready to take advantage of the misstep. Admittedly, there are some sectors in which there is not sufficient competition. It is easier in these sectors for corporations to increase prices because there are less competitors to keep them in line with the market. But in these instances, the government more often restricts competition, rather than encourages it. So I would contend that where we see a lack of players in the market, less government intervention is often a better cure than more.
Now I admit there are certain instances where a company has gained such control over a sector that government intervention is necessary. But again, this involvement should be to stimulate competition – not to stifle it. I’ll give you another example of how the market can often discipline itself. My 16-year-old son just got his first real job. He’s working part-time, and the company for which he is working could have started him at minimum wage. But this company knows that the market for labor is incredibly competitive, so it started him out higher than I would have anticipated because they know another company could easily snatch him up if they do not pay a competitive wage. In this case the market is better equipped to set a “minimum wage” than the government as this number is really always changing based on the supply of workers and the demand for the services of those workers. Competitors are disciplining one another to pay a competitive wage, because if they don’t there is another company out there who will. So in summary, don’t always dismiss price increases as motivated by greed. It may simply be the result of increasing costs for that company. But even in those instances where we see a Mr. Potter character from “It’s a Wonderful Life” taking advantage of consumers, a competitive marketplace will give consumers alternatives and that greedy company will eventually go out of business.
While we are still wrestling with inflation in the U.S., they are struggling with deflation in China. Demand for Chinese goods is waning, and many U.S. companies who have sourced things from China are now building distribution centers and factories in the U.S. to give them a more stable supply chain. The pandemic exposed our dependence on other countries like China and the war in Ukraine is only exacerbating this trend. This process of reshoring will be decades in the making, but it could make the taming of inflation even harder for the Fed.
What else is Inflation going to impact? How about the National Debt. The interest rate to finance our current budget deficits has increased fourfold over the last year. In other words, the cost of the U.S. borrowing money to cover the difference between what we have coming in and what we are spending has gone up dramatically. Our national debt now stands at 118% of GDP according to the St. Louis Fed. Some politicians are starting to talk about it, so expect the topic to be one of many talking points in 2024.
I’ll close with a tip for small businesses – know your costs. In an inflationary environment, if your margin was 10%, a move up in some of your costs can cause your profit to evaporate in short order. Don’t wait to know your costs at year end, keep up with them monthly or quarterly. As fast as prices can move in this environment getting information on your costs as close to real time as possible will give you a better chance of weathering this inflation storm, however long it lasts. It’s not enough to have strong sales. You must manage the cost to produce those sales.
At MBC / Foundation Bank we are more than a lender to our small businesses – we are a source of counsel. Running a small business is so hard and complex that you need an army of advisors to help you stay on course. We believe that we are able to be one of those advisors for your small business. Start your financial conversation with us today. If you’ve found this podcast helpful, we hope you’ll subscribe to it in your favorite podcast app and share it on social media. Until our next episode, God bless you.
-President Chad P. Wilson, CFP
Today’s episode of “Money Matters” was written and recorded by President Chad P. Wilson of McKenzie Banking Company / Foundation Bank on August 15, 2023. This episode does not constitute financial advice. Please consult a financial professional to discuss your specific needs. MBC/Foundation Bank is an Equal Housing Lender, Member FDIC.