Can Corporate Greed Really Explain Inflation?

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If former President Donald Trump wins next week’s election, perhaps no issue will have been more pivotal than inflation. Earlier this year, Gallup polling showed that the number of Americans who worry “a great deal” about inflation was larger than the number worried about crime, homelessness, health care, immigration, and even Social Security.

And the anger has perhaps been fiercest over the cost of groceries. People buy groceries regularly, and unlike other goods, food is a necessity—you can’t simply opt out of food because prices have gotten too high, the way you might wait out buying a car or a couch. At their recent peak, in August 2022, grocery prices had increased 14 percent since the previous year. Although inflation has cooled significantly since then, that doesn’t mean prices have actually gone down; it just means prices have stopped rising as dramatically.

But why did all this happen? One explanation that has become more popular is “greedflation,” the idea that corporate greed, via excessive markups, is responsible for the pandemic-era price increases. But the word is used so differently by politicians, economists, and regular people that it’s become a confusing term of art. It can’t be that companies suddenly just got greedy in 2021, yet there’s a growing belief—particularly in some parts of the Democratic Party—that corporate greed is at the heart of the inflation problem.

Today’s episode of Good on Paper features a discussion with the director of economics at the Yale Budget Lab, Ernie Tedeschi. Tedeschi was the chief economist for the White House’s Council of Economic Advisers until earlier this year and had a front-row seat to the inflation narratives and data of the past four years. On today’s episode, we talk about what greedflation is, what it can explain, and what it can’t.

The following is a transcript of the episode:

Jerusalem Demsas: From February 2020 to this July, grocery prices grew nearly 26 percent, outpacing overall inflation.

Inflation is one of the key issues concerning voters this year, and it’s been a pain point that Kamala Harris has been working to address and that Donald Trump has been seeking to weigh her down with. Searching for a politically expedient explanation for why inflation happened is a difficult problem.

People don’t want to hear that supply chains were snagged. And the only other go-to explanation—that there was too much demand—would make President Biden’s $1.9 trillion stimulus package that Congress passed seem too generous in retrospect, which helps explain why another idea has taken center stage. When asked at her CNN town hall last week about the cost of groceries, this is what Harris had to say:

Kamala Harris: We will have a national ban on price gouging, which is companies taking advantage of the desperation and need of the American consumer and jacking up prices without any consequence or accountability.

Demsas: But how good of an answer is this to a voter worried about inflation? Can we really blame price gouging or corporate greed for the pain felt by consumers over the past four years?

The idea that corporate greed is responsible for inflation is sometimes called “greedflation,” a catchy and simple portmanteau that helped root the idea into the minds of consumers. But like many careful and interesting economic arguments, when it begins to be used by politicians, it can lose its analytical rigor.

[Music]

Demsas: This is Good on Paper, a policy show that questions what we really know about popular narratives. I’m your host, Jerusalem Demsas. I’m a staff writer here at The Atlantic. And today, I’ve invited Ernie Tedeschi onto the show. Ernie is the director of economics at the Yale Budget Lab and formerly the chief economist at the White House’s Council of Economic Advisers. And I wanted to talk with him about the ways the greedflation narrative simultaneously illuminates and obscures the inflation debate.

Ernie recently published a piece for Bloomberg, showing that grocery prices can’t be blamed on greedflation. He does this by showing that markups can, at the very best, explain just a quarter of why grocery prices rose so much.

Ernie, welcome to the show.

Ernie Tedeschi: Thank you for having me.

Demsas: Yeah. So we’re here to talk about inflation, greedflation. You’re going to solve all of it for us.

Tedeschi: (Blows raspberry.) We should end the show now.

Demsas: Yeah. Exactly. (Laughs.) So let’s just start at what the standard macro theory of inflation is. Under this model, what happens? Why does inflation occur?

Tedeschi: Sure. Inflation happens when there is too much demand chasing after too few goods. So it can happen because demand increases and supply doesn’t respond, and/or it can happen because the supply of goods contracts, for some reason, and demand doesn’t respond. It can happen for any combination of those two things happening at the same time. Either way, the net result is the same, which is that prices go up.

Demsas: And so when we think about the COVID shock, can you just talk us through that story and 2020, 2021, 2022 inflation based on that theory?

Tedeschi: Sure. The COVID shock is kind of interesting because the story is a little different when you look in aggregate, overall—like, 30,000 feet—and when you drill down into specific sectors. It’s also different when you look in 2020, early on in the story, and then when you look later on, in 2021 and 2022.

So let’s look overall, and let’s start with 2020. In 2020, COVID shock happens. A lot of people are thrown out of work. Country is in chaos. There’s a lot of uncertainty. People don’t know what’s going on. The unemployment rate rises officially to 15 percent. That’s probably an underestimate. The Bureau of Labor Statistics comes out later and says, Actually, we’re probably mismeasuring it. It’s probably as high as 20 percent in April of 2020.

That’s the highest unemployment rate since the Great Depression. It is a very high, sharp rise in the jobless rate. When there is economic weakness, that is a fall in demand that reduces pressure on prices. And so when you look at overall inflation in 2020, in those early months of the pandemic, you see a reduction in inflation, which makes sense in the aggregate macroeconomic sense.

Demsas: So people are poorer?

Tedeschi: People are poorer. And remember, too, that there are some parts of the economy that are literally closed off to them. They are literally not allowed to go to restaurants. Also, they are probably not willing to go to restaurants because of the high public-health risk.

But then you drill down into specific areas, and there’s a relative-price story. And what I mean by relative-price story is that you do see higher inflation in some sectors of the economy than others. We do start seeing acceleration in grocery. So why would we start seeing acceleration in grocery prices relative to other parts of the economy?

Well, No. 1, there’s just this disaster mentality that starts kicking in with people. It’s the toilet paper. It’s the bottled water. Those are the first things that run out at the grocery store when those sorts of things happen. That’s what happened in COVID. I could not get toilet paper for months after March of 2020. That’s what we started seeing with grocery stores.

And the thing that you have to remember, what inflation is: It’s too much demand chasing after too few goods, and supply can’t respond. Now, supply not being able to respond is a key part of that story. It’s not just that grocery stores ran out of, say, toilet paper, in this case. It’s that the toilet paper producers couldn’t bring enough capacity back online or open up new capacity to respond to that extra demand.

Demsas: Because normally what we’d expect is, Oh, wow. There’s a lot of money to be made in selling toilet paper. We got to make a bunch more!

Tedeschi: Exactly. And the reason why that didn’t happen is, No. 1, all of these entrepreneurs who might have been thinking about, Oh, I could make money opening a new toilet-paper factory, probably said to themselves, Okay. This is a short-run, very uncertain situation. Why would I take a risk opening a toilet-paper factory?

More seriously, what happened in this situation is: The toilet paper manufacturer said, We just can’t cut down the trees and go through the process of making more toilet paper and hiring the workers fast enough to increase production to be able to meet this demand in such a short time frame. So the net result is that, within grocery stores, there are certain goods that are seeing higher prices.

And then the last thing to remember is that, in normal times, people need to eat, and we get our food from a variety of sources, not just grocery stores. So what you see is: Restaurant spending goes down dramatically in March and April of 2020, which makes perfect sense. And so then what people do is they substitute toward grocery spending. Grocery demand goes up—almost tit for tat dramatically up—in those months.

Demsas: I guess, then, thinking about all of what you just said in the standard macro theory, you have a lot of aggregate demand that’s built up. I mean, you didn’t mention the stimulus that goes into place that—

Tedeschi: Oh, yeah. This is 2020. We’re not even there yet.

Demsas: We’re not even there yet. But even the aggregate demand that’s being redirected from services that people would otherwise have been purchasing: You’re not going to get a massage. You’re not going to go to the movie theaters or other kinds of services that you would get. And you’re, instead, going to take all of that yoga-class spending and exercise-class spending and buy things with it.

So people were buying, like, Oh, I have new hobbies. For instance, people taking up knitting, people taking up different kinds of hobbies you could do at home, buying a lot more things, clothing, all this sort of stuff. And so that puts a bunch of pressure, but also, like what you just said, this supply-chain pressure, and that’s kind of the standard theory of what’s going on with inflation.

Tedeschi: Exactly. And then I think that you brought up an important point with the demand side. So we had a series of demand-side stimulus payments. So there was the CARES Act in March of 2020. There was the December 2020 payments that actually went out in January of 2021, but it was approved in December 2020. And then there was the American Rescue Plan that was passed in March of 2021, and they mostly went out in late March 2021, April 2021. So there were three rounds of stimulus checks.

Demsas: But it’s not just the checks, right? It’s also the state and local aid. It’s also, in general, just pushing all that spending.

Tedeschi: That’s right.

Demsas: Under the standard theory, then, does standard economics tell us what should happen with markups and corporate profits when it comes to inflation?

Tedeschi: Yeah. Standard economic theory tells you that when supply can’t respond in the short run and there’s an expansion in demand, the price goes up. And that increase in price, in reality—and by reality, I mean the reality that we see on an income statement from a business—is going to show up mainly in the form of a markup. Because think about it from the businesses’ perspective: I have paid, let’s say, 25 cents to buy this can of Campbell’s soup wholesale, and I’ve put it on the shelf, and suddenly there’s this huge demand for this can of Campbell’s soup. What am I going to do? I don’t want to run out of this. So I mark it up to find the right price where we’re balancing supply and demand. That markup to find that equilibrium, that balance, is going to show up on my income statement as a markup. Because, again, I paid 25 cents for that can of soup wholesale.

Now, eventually, the wholesaler might then mark up that can of soup, in which case, my margin as the retailer might go away. What’s interesting is that we don’t seem to see much evidence of that with retailer markups. Retailer markups did go up over the pandemic, and they seemed persistently higher over the pandemic, although it doesn’t explain a whole lot of the grocery inflation that we saw over the pandemic.

But, in theory, I do want to emphasize that, like, retailers aren’t the only actor here. Further behind in the supply chain—you know, the farmer, the producers of the potato chips, the wholesalers—they can all raise their markups, and the retailer is at the mercy of them, and that is folded into the cost of goods sold for the retailer, and it’s taken out of the retailer’s margin.

Demsas: And so then, the response to inflation under this theory, right? There’s two standard ways that this happens: one is that the Fed should raise interest rates, and the other is contractionary fiscal policy, so you could have the government reduce spending or raise taxes. Can you explain how those end up reducing inflation?

Tedeschi: Sure. So let’s say that there’s a general price increase in the short run. The Federal Reserve reacts to that by raising interest rates if they decide that it is problematic, and it’s a debatable policy. I think that monetary policy clearly works in the United States. It doesn’t work as well as it does in other countries.

But the basic theory is that you raise interest rates, and raising interest rates slows down economic activity a little bit. So your credit card interest rate goes up, and so you spend a little bit less—interest rate–sensitive goods, like cars, for example. Housing, of course, is the textbook example of an interest rate–sensitive good. Churn in the housing market falls. Other interest rate-sensitive goods—you know, durable goods, like a washing machine, any big household appliances—those sorts of goods will slow down when interest rates go up.

Demsas: And firm investment goes down, too, right?

Tedeschi: Exactly. That’s right. The other side of that is that loans that businesses will take out to expand business and industrial loans—you know, the rate of taking out those loans should go down when interest rates go up. So it’s putting the brakes on the economy a little bit.

Demsas: And so there is a growing, popular narrative that there’s a different way to look at inflation. And I think I want to be careful here because I think there’s seemingly a bunch of different things that people are talking about. Often, I think this happens a lot in policymaking, where an economist writes a paper that’s quite careful or more careful than the popular conversation, and then it gets turned into, Oh, this is a very useful political tool. And so it gets divorced from, maybe, the fundamentals of that conversation [and turned] into something else.

So what I’m talking about here is greedflation. And I think one thing that’s interesting about this that I learned about inflation is a standard macro theory—what you laid out here. And this new theory is a micro theory. And so first, can you explain the difference between macro and micro, which for a lot of people think, Oh, big/small, which is not what that means. And then also, what is greedflation?

Tedeschi: Sure. So big/small is not a bad first approach to understanding the difference between macro and micro. The way I think of the difference between macro and micro is: Macro is trying to understand the dynamics of aggregates, and micro is trying to understand the dynamics of individual actors.

With micro, for example, you are trying to understand behavioral shifts that will affect individual consumers, individual firms and how changes in circumstances will affect those individual parameters. In micro theories of how firms respond and how consumers respond, a big question is: How do individual firms respond to supply constraints in this case? I think in the case of greedflation, the question that they’re trying to answer is: How do firms respond, and how do they coordinate amongst themselves when there are supply constraints? And that’s very much a micro way of framing the question.

Demsas: And so greedflation—I think many people have popularly heard this, and they conceptualize it as, Okay. During the pandemic, all of a sudden, companies realized that they could really extract a bunch of profits from people, because of the emergency that we’re in. But I think, mostly, this theory is borne out of a paper by economist Isabella Weber, and she doesn’t use the word greedflation. I think she’s actually quite careful not to use that word. She says, “sellers’ inflation.” So what is sellers’ inflation?

Tedeschi: Sure. Let me start by backing up and saying that all businesses are profit motivated, and one might even call them greedy. And I hope that even people who disagree on sellers’ inflation or hate the word greedflation would agree that businesses have a profit motivation here, right?

Demsas: I thought capitalists were supposed to be in favor of that. (Laughs.) I thought we all agreed it’s—

Tedeschi: I hope we can all agree on that. I find sellers’ inflation a very interesting theory because I see it as a micro-motivated way of filling in the details of the short-term story. In other words, I don’t see it so much a brand-new theory or an alternative theory about what’s going on as an expanded universe of the short-term story.

Before, when you and I were having a conversation, we described a sort of short-term story: Demand goes up. Supply can’t respond. Prices go up. And it was a very sort of theoretical Econ 101—like, “We’re drawing lines on a graph” type story. And this is the sort of thing that Econ 101 does horribly, where we focus so much on drawing these lines, and we don’t do a great job of actually describing what these lines represent or why these things shift. And I feel like what’s great about Weber’s paper is it’s actually trying to describe the psychology and the coordination that might be going on beneath the surface of those short-term line shifts.

And in this case, what she’s saying is, Look—in the short run, first of all, we don’t have perfect competition. And I think that every realistic economist understands that, especially in regional economies—even in New York, where there are bodegas on every corner—there is not perfect competition. And certainly in the short run, you can’t open up a bodega overnight, so you can’t even have perfect entry. In a world without perfect competition, the grocery firms who see this supply constraint—and remember that grocery stores are often all buying from similar suppliers, so they have information about supply constraints—They either implicitly or explicitly coordinate amongst themselves on price increases, and they coordinate amongst themselves to keep prices high.

That’s an interesting narrative, to me, and a plausible narrative, to me, as a short-run mechanism or story for how the conventional short-run story plays out, in reality, in a world without perfect competition and short-run supply constraints—that you have these profit-motivated firms, there is some informal or even formal coordination, and they act to raise prices. And remember that we’re talking about food. People are going to substitute other needs for the sake of groceries, right? So a lot of this makes sense.

So I think where I get off the sellers’ inflation train—and I’m not saying that Weber does this, but I think that some people that have tried to extend her research have done this—is, No. 1, in trying to take the short-run story and make it a long-run story. I don’t follow how her short-run story, necessarily, follows as a long-run story. Secondly, using her story as a way to explain not what happened in the chaotic days of March, April 2020 but also as a way of trying to explain what’s happening in the much more mellow days of October 2024, where we, for the most part, don’t have any supply-chain bottlenecks right now, other than maybe some bottlenecks in terms of avian flu and eggs, which have nothing to do with COVID. It’s something completely different. That story should not be a factor right now, and I don’t find it convincing.

Demsas: I think Weber’s story—she has this four-part thing that you’ve talked about. But I think it’s useful to get into the details of the behavioral side of what she’s saying is happening on the firm level, right? She says that firms tend not to lower prices in order to prevent price war.

So you’re a firm. Let’s say you’re selling carrots or whatever, and you know if you lower prices, then you’re worried that your competitors will also lower prices, then you’ll be forced into a price war. And so you’re really, really loathe to lower prices, even if your marginal costs have gone down. But they do raise them to protect profit margins. That’s part one of her story.

The second part of her story is a sector-wide shock. Let’s say something like COVID. It can basically—what she says—it could “create tacit agreements between firms to hike prices.” And by this, I think it’s possible that this could include, of course, explicit collusion between firms. But I think that what she’s most often talking about is; As a firm, you understand your competitors. You understand what they’re likely to do. You understand their behavior. You understand their incentives. And you’re like, None of us want to lower prices. Let’s not do that. Let’s all raise prices. And obviously, if you see someone lowering prices, then you’ll change your behavior. But given that you’re like, We all don’t want that to happen, you have that tacit agreement form behind the scenes.

Then the third part of the story is that you have this temporary monopoly power that she talks about. And I think she’s using the words monopoly power here, but this is, again, what we talked about can exist in just the normal standard economic theory in the short run. Of course, there’s temporary monopoly power—temporary, at least, increased pricing power—because people can’t enter into the market quickly. That’s the third part of the story.

And then the fourth part is another behavioral thing, which is this idea that emergencies can create a legitimizing narrative to raise prices. It’s possible that consumers are very upset when they see prices go up. And so if they feel like you’re being unfair to them, they’re going to treat that price raise differently than if they’re like, We all know what’s going on. There’s a national emergency. Of course prices are rising. You’re just more willing to pay that price. So that’s the theory that she’s laying out there.

I think that she’s very close. She’s creating a model here. It’s a time of a lot of competing information. There’s not a lot of data that can be used in order to determine whether or not you have a causal story here. She’s just developing a model. But she does say it’s possible that this could be extended into long-term inflation, in that you can end up having a reaction from labor to increase wages as a result of all of this. Because this inflation is happening because of sellers’ inflation, then you get to that classic wage-price spiral, if I’m understanding here correctly. You don’t find that plausible?

Tedeschi: No. I don’t find that last step plausible. Let me go through each of those steps and tell you where I agree. I absolutely find the first couple of steps very plausible. Like I said, I think that those are ways of adding meat to the conventional short-run story. How does the conventional Econ 101 short-run story actually work in a world without perfect competition and perfect information? And I think that that is very plausible. What she’s talking about in terms of the asymmetry of price increases versus price decreases is often called “rockets and feathers.” And we know that that phenomenon exists in other contexts, as well. We know, for example, that it exists with gas stations.

Demsas: Can you explain why it’s called rockets and feathers?

Tedeschi: Oh, sure. Sorry. Actually, I’m glad you asked that, because I asked that question the first time I heard it from oil traders. In the context of gas stations, it refers to the phenomenon of how quickly retail gas prices react to changes in crude oil prices. And it means that when crude-oil prices go up, retail-gas prices go up right away—rockets. But when crude oil-prices come down, retail-gas prices come down only slowly—so feathers, in that case.

And it could be partly competition. Although, talking to competition economists at CEA [Council of Economic Advisers]—they’re always a little bit skeptical of that in the context of retail gas, because there doesn’t seem to be competition issues with retail gas. There are lots of gas stations in most areas of the country. There are some other competing theories about why that may happen. It might have to do with the way that oil prices are hedged on markets. It might have to do with expectations. It might have to do with risk. There might be something to do with firm mentality, absolutely. There could be some corporate psychology involved, as well. I’m not saying that there is not room for something that is sellers’ inflation-like in the short run to play a part in this, as well. And something like that could absolutely be happening with grocery inflation, as well.

The reason why I get off the long-run train with this story is that, for this to happen in the long run, consumers have to be a willing part of this the entire time, right? And one can absolutely see how that happens in the short run. Again, we’re talking about food or, in my example, gasoline. Both necessities, in that case, right? But in the long run, it’s a prisoner’s dilemma for the grocery stores. You only need one firm, one bodega, one grocery store to defect and to lower prices and to get the market share from other consumers.

Now, in the middle of a pandemic, in the middle of supply-chain constraints, it’s really easy to hold the line with grocery stores and to keep prices high, because they’re under supply-chain pressure, and everybody has real, actual cost-of-goods-sold constraints to keep prices high.

But once those supply-chain constraints ease—which, in the case of the pandemic, they did, right about 2022, 2023—I mean, basically what she’s talking about is a cartel, right? Basically, the glue that’s holding the cartel together, region by region, is just this idea that we want to maintain high margins—which, again, everybody involved here is profit motivated. There’s no question about that. But you just need one grocery store to defect and lower their prices and get all the market share from customers. And that’s really hard to maintain—

Demsas: In the long run.

Tedeschi: In the long run, exactly.

[Music]

Demsas: After the break: why grocery-store profits hit new heights after the pandemic, and why generic brand mac and cheese could be the reason.

[Break]

Demsas: Markups were high relative to the historical period. There’s a Mike Konczal article—he was an economist at Roosevelt [Institute]. Now he’s in the White House himself at NEC [National Economic Council], not the CEA. He has a paper with his co-author, and they find that “markups and profits skyrocketed in 2021 to their highest recorded level since the 1950s.” And he also finds that markup increases were happening “across many types and sizes of firms,” but “a strong predictor of the increase in markups during 2021” was whether you had pre-pandemic markups, as well. And so he says that that suggests market power is an explanatory driver of inflation.

Tedeschi: Interesting.

Demsas: What do you think about that?

Tedeschi: In my Bloomberg piece, I found this data set from the Census Bureau, which I really like. It’s called the Quarterly Financial Reports. And I like it because the downside of the Quarterly Financial Reports data from Census is it doesn’t allow you to isolate individual firms. But the advantage of it is that, unlike the way markup analysis is normally done, which is on a firm-by-firm basis—you know, you normally have to download, in the case of grocery stores, you know, All right. I have to download Albertsons. Now I have to download Kroger. And I have to, you know—I have to get—and you’re limited to just publicly available financial statements.

The Census data is all public- and private-industry data for any large retailer with assets above $50 million. So we capture both the public and the private retailers, which—the normal point-by-point analysis that’s done will completely miss the private retailers. That’s important with grocery analysis because some of the biggest grocery-store chains, like Trader Joe’s and Aldi, are private. They’re not public. So we miss them if we just focus on public. Now, with the Census data, we’re limited to firms with assets of $50 million or over.

That explains about 60 percent of grocery spending in the United States. So we do miss your New York bodegas, your mom-and-pop shops. So I want to emphasize that part of the story with markups could be with small places marking up their prices in the middle of the pandemic too, but there does seem to be a markup story that’s worth exploring even within these large firms as well. So that’s what I focused on in my Bloomberg story.

What I found is that the markup behavior of grocery stores and nongrocery retailers was very different throughout the pandemic. So grocery stores tend to have lower overall markups than nongrocery retailers, but they behave very differently in the pandemic. Nongrocery retail, so think Home Depot or the Gap, for example—their markups popped very quickly in the depths of the pandemic. They went from 7 percent—when I say 7 percent, I mean whatever their costs were, and I’m including labor costs in this, as well, so not just the cost of goods sold, but also their labor costs, as well. So their markup was 7 percent above costs to very quickly, by the end of 2021, 9 percent above costs. But then it very quickly came down after 2021 to even lower than it was before pre-pandemic. So I’m using my finger to draw a graph here—

Demsas: That no one else can see. It’s just for me. It’s just for me.

Tedeschi: So just imagine a pop up and a pop right back down.

Grocery stores were very different. So right before the pandemic, their average markup was 5.3 percent above cost. So in level terms below where nongrocery retail was, they didn’t pop. They sort of simmered very slowly up in the middle of the pandemic, but then they never came back down. They went from 5.3 percent to—they’re at 6.8 percent now, and they’ve been sort of persistently at that near 7 percent over the last year or so, with no sign of coming back down.

That’s notable for a couple of reasons: One, the fact that they haven’t come back down. Two, the fact that they’ve mostly closed the gap with nongrocery retail, because, again, nongrocery retail is at 7.5 percent above costs. So it’s actually interesting that what used to be a two percentage-point gap is now like a half percentage-point gap. So that’s interesting.

So on the one hand, I look at this aggregate data, and I say, Whoa. Like, grocery markups are much higher. That’s ridiculous. Like, something has changed about this industry. But then I started digging into what this means, and it gets a little more complicated.

No. 1: This actually can’t explain very much of grocery inflation. So when you look at grocery inflation cumulatively over the pandemic, we had 23.5 percent grocery inflation from the end of 2019 to the first quarter of 2024. That’s more than everything else in the economy. Everything else, excluding groceries in the economy, was 17.2 percent. Now, I want to emphasize that just because groceries was greater than everything else, that doesn’t mean anything untoward was going on in groceries. Like, if that were true, then, by definition, half of inflation every month would be—

Demsas: That’s how averages work.

Tedeschi: Exactly. Right? Right. So that’s one thing.

I did a very quick-and-dirty simulation where I said, Okay, what if retailer margins—and I want to emphasize that everything I’m doing here is just looking at retailer margins. I’m not looking at wholesaler margins. I’m not looking at PepsiCo margins, farmer margins. This is just, like, the Albertsons, the Kroger, etcetera—like, their margins. What if their margins had just stayed at 2019 levels? What would inflation have been? And what I found in that simulation is that inflation, instead of 23.5 percent, would have been 21.8 percent. So markups explain about a tenth of the cumulative grocery inflation that we had over time.

Now, I want to be fair—I talked earlier about relative price inflation versus general price inflation. So everything in the economy was rising in price. So I think a better way of thinking about inflation during the pandemic was like, Look—there was broad price pressure going on. So it’s incorrect to think about just grocery prices in isolation. It’s probably better to think about grocery prices relative to everything else going on in the economy.

And so in other words, grocery prices beat overall inflation by 5.4 percent. So, you know, grocery prices grew faster than overall inflation by 5.4 percent. Had it not been for the greater markup growth, they would have beat overall inflation by 3.9 percent. So that explains about a quarter of that premium. So that’s a little bit more. That’s a greater share. But that’s still not a majority of what we saw.

Demsas: I think this is an important point because what you’re pointing out is that, even if greedflation is true, it can’t explain the vast majority of inflation that happened.

Tedeschi: Yeah. That’s right. So I think a really important point is—yes—markups are up, but they can’t explain the problem here, which is grocery inflation. So that’s No. 1.

No. 2 is that—okay, so this is the aggregate data. Now let’s actually drill into the individual company data that we have, which is the traditional way of looking at this. And what struck me is that, when you look at these individual companies, most of them are back to pre-pandemic markup levels. So Kroger is back to pre-pandemic markup levels. Almost all of the usual suspects are back. The only two that are meaningfully above are Albertsons and, I think, Sprouts. And those two can’t really explain the aggregate shift up that I see in the aggregate Census data.

Now, remember what I said before about public and private data. What I don’t have visibility into are the private firms, like Trader Joe’s and Aldi. And I want to emphasize that when I say I want to see data on Trader Joe’s and Aldi, I’m not even suggesting that their markups went up. I’m suggesting that, in the case of Aldi, for example, if they expanded and if they’re a greater share of grocery spending over this time, then Aldi may be just a higher-margin-type store, right? And so they just may compositionally be putting upward pressure on what we’re measuring.

Demsas: And I mean, I know you’ve focused on grocery stores, but I want to ask: Do you think this is generalizable to other places where we saw high markups? Would you expect there to be something different going on in other places, whether it’s auto or etcetera?

Tedeschi: So no, because I think—so maybe in a couple of different areas, but I think that there was something special about grocery stores that happened. I think my leading theory for what’s going on here is what’s called private label. Private label is just the fancy sort of tech term for store brands. We used to call them generic brands, but, you know, store—

Demsas: Good & Gather.

Tedeschi: Yeah. Exactly. It used to be that the store brand was just generally viewed by consumers as cheap and undesirable, and it was put on the bottom of the shelf, and people just never bought it—unless you were a low-income consumer, and it was generally seen as several tiers below.

That has changed dramatically over the last two decades, to the point where now consumer attitudes surveyed by, say, Nielsen, for example, have found consistently that consumers now view store brands as equal in quality, if not higher in quality, to national brands, on average. So people go to Albertsons or Kroger or Wegmans, and they think of those store brands.

Demsas: Everyone’s going to know what region you’re from.

Tedeschi: Yeah. Exactly. I’m sorry. Safeway, Vons.

Demsas: Or Target. (Laughs.)

Tedeschi: I’m a Southern California native so, you know, I’ll throw those in there. And, you know, they view those brands as just as high quality as the national brand. So that’s No. 1.

No 2. is that store brands are lower price and higher margin for the store.

Demsas: Yes.

Tedeschi: So let’s pretend, for a moment, that we just went through a period of really high inflation. I know it’s hard to imagine, but let’s just pretend for a second. So what do you, as a consumer, do? You go to the store, and you say, Huh—I can substitute for something that I think is just as good, and it’s lower price for me. I might as well buy this and save some money. So you buy it.

Demsas: So instead of, like, Kraft Mac & Cheese, the Target mac and cheese.

Tedeschi: You buy the Target mac and cheese. Exactly. What does that do to the income statement of Albertsons, or what does that do to the overall income statement when we look at Census data? Well, it might look like, all of a sudden, the industry has a higher markup, overall—not because they are fleecing their customers or because there are competition issues, but because the composition of what people are buying is higher-markup items, more private-label items. A subset of that might be, Well, what if people start going to stores that just have a greater proportion of private-label goods?

Well, remember when I said there are certain stores that we can’t see individually in data, because they are private stores, right? It just so happens that the two stores that are overwhelmingly private-label goods are Trader Joe’s and Aldi, which means that they are low price, high markup. Going back to my theory, Aldi has been expanding in the United States and probably represents more and more of what we’re seeing in the aggregate census data for grocery stores. Aldi also happens to be a very high-margin, private-label-type store. So that may be affecting the average industry-wide margin that we’re seeing in the data. That is not nefarious; that reflects shifting consumer behavior.

Another hypothesis that I have that I’m less convinced about because, if this were true, we would see it in some of these individual firms, and we don’t. But I’m going to throw it out there anyway. Another shift in consumer behavior that we’ve seen has been a shift toward grocery delivery. And if you’ve ever used a grocery-delivery site, you know that it’s not just the fee that you pay for the delivery. You know that each of those items—that you buy that Campbell’s soup, and you’re like, Huh. That Campbell’s soup looks really expensive when I add this to my cart. It’s got a huge markup on it. The reason why I’m not quite convinced about this yet is that, No. 1, a lot of these grocery stores will outsource to a firm, like Instacart.

Demsas: Yeah.

Tedeschi: But grocery delivery is clearly more popular than it was pre-pandemic. You know, we have independent verification of that. That’s a shift in consumer attitudes that may be playing a role somewhere in the data, as well. So I don’t want to shut the door on that hypothesis either.

Demsas: But you know, it’s funny. As you’ve mentioned, you were in the White House during a lot of this, and you just recently left, in March. And it seems like greedflation was very influential as a theory in the White House. What did you think was happening when you were there?

Tedeschi: So a lot of this work stemmed from me, in the White House, digging into some of these claims. I disagree that it was influential in the White House. I think that we were curious about it in the White House. I think that, in the White House, we wanted an explanation for what was going on. I think that we saw high grocery prices, we saw high inflation overall, and we wanted to know: Does there need to be policy action in any of these things? And so in some cases, there were clear areas where the White House could intervene, add value—and there was a problem to be solved.

With grocery prices, there was a question of: Is there something here? Is there a market failure here? Is there a competition issue here? Is there something else going on here? The other thing to remember is that, when it comes to competition, that’s handled by the FTC, which is independent. And so the White House doesn’t directly intervene in issues like that. But we were curious, overall, like, What is the story here? Is there anything going on?

And my initial analysis was on the aggregate markup. And it sort of happened in steps, where I saw that the aggregate markup had gone up, and I said, Whoa. That’s interesting. That is different than the rest of the industry. So there does seem to be something here. And then step two was figuring out how much of grocery inflation that could explain. And then I said, Huh. That doesn’t really explain much of grocery inflation, so maybe there’s something else going on here. And then it was getting access to the individual financial statements and kind of figuring out which individual firms might be driving what’s going on. And then the mystery just got deeper and deeper into—it was like a murder mystery. And you know, like Agatha Christie, it just got more and more complex.

Demsas: I mean, my question is just, like: It seemed influential from the outside, but you’re telling me that you don’t think it was.

Tedeschi: I don’t remember President Biden endorsing greedflation in speeches. I remember him using—maybe he used sort of the veneer of greedflation in remarks, but I don’t think he ever came out and said, like—

Demsas:I read Isabella Weber’s paper.

Tedeschi: Exactly. They’re coordinating, and there’s going to be a long-term wage price spiral unless you lower prices now.

Demsas: That’s fair. The thing that’s most relevant here is, I think—what I like about this conversation is that we actually got into sort of, like, the specifics of what this theory actually means, and the parts of it that you agree with and places where you diverge.

But I think what’s interesting about watching this debate as a journalist who focuses on the economy is that it mostly seems like a cold war about other things. Like, why is it people got so incensed about the reason why inflation might be happening? Part of that is, of course, like, it might affect the types of policies you would recommend doing if inflation is happening for different reasons. But another part of that, too, is that there’s another fight that’s going on about how much people should be focusing on concentration and monopoly power as core sources of harm in the American economy. And so is that also how you kind of saw this quasi-proxy war going on?

Tedeschi: Yes. And for example, the debate over Vice President Harris’s price-gouging debate, which I just saw as a debate over competition. And to me, I was like, How is there a debate over this? There are food deserts all over the country. Like, there should absolutely be more competition with grocery stores in a lot of these areas. That, to me, is unobjectionable.

Demsas: But people aren’t talking about the actual policy, you know what I mean? Like, if you were lay out, Hey. Do you think—I mean, traditional capitalists should want there to be more competition in markets. Like, that is a core concern of even the most free-market libertarian economists. That’s the basis of how you think about a well-functioning economy.

But there was an attempt, I think, by some people who were using the greedflation theory to say, Well, the Fed shouldn’t be engaging in raising interest rates, because it’s not about that. And so I guess I want to ask you: If part of the story ends up being the sellers’ inflation in the short run, and in the short run, what’s going on here is this firm behavior, does that change the types of policies you think the government should pursue in order to bring inflation down?

Tedeschi: Yeah. That’s a good question. It might. For example, if we were confident about sellers’ inflation in the short run—so let me give you an example of something in the short run that might prevent it, which is a windfall-profits tax. Now, that’s very hard to implement fairly, and—

Demsas: Sorry. Can you explain what that is?

Tedeschi: Oh, sorry. The government comes in and says, We think your profits should be this, based on some baseline. If they’re above that, we’re just basically taking it all, or we’re taking it near all. That’s really hard to do in a fair and equitable way, but on paper, it could have prevented the sort of sellers’ inflation behavior that Weber is talking about, right?

Like, these firms want to raise their prices and increase their margins, and there’s this windfall-profits tax on the other side of that that tells them, like, No. You’re not going to make any more margin if you do that. That’s probably a horrible way to approach this, because remember: Greedflation is such a horrible way to explain what’s going on here. The higher margin, in this case, is just an outcome of the short-run economic process. And whether that process is implicit coordination or whatever, what’s really going on is there is a surge in demand that is hitting a short-run, inflexible supply.

And look—you can either have an increase in prices, or you can have a shortage of goods. You can have rationing. And in reality, grocery stores do a little bit of both, right? Like, we have all been to Costco and, you know, been limited to two stacks of bottled water, right? You know, that happens. But look—I remember when grocery stores ran out of toilet paper, and I was pretty pissed off, probably about as pissed off as I was with higher prices. And so you’re not avoiding consumer ire by choosing one over the other, right? Like, they’re both pretty bad.

Demsas: But are you concerns with the windfall-profits tax mostly just implementation? Like, how are you deciding what the amount is?

Tedeschi: That’s exactly what I’m concerned with.

Demsas: Like, if you could target it, right? If you could know somehow, like, ex ante, how much profit is on target and what would be considered excess, and implement that fairly, would that actually have the impact that we’re talking about here?

Tedeschi: I mean, again, in an Excel spreadsheet, yes. But there’s just no way, ex ante, that you would know how to target it, what the proper amount of profit would be. And I think that the potential for abuse by government would just be way too high. Questions of populism and pay to play are front of mind right now in this election, and this is exactly the sort of thing where favoritism could easily be abused. And I don’t even mean it in a partisan way. Like, it can be abused by both sides in the future. And so I just don’t think that’s—it should not be the way to go.

I will say more generally, in the case of emergency-price-gouging laws that are in the books in some states and localities and what Vice President Harris has proposed, I think that there is a very substantive debate to be had about whether emergency situations like that—they’re not perfect market situations. There is asymmetric information between the grocery store or the gas station and the customer in those emergency situations. Also, like, willingness to pay is not the same thing as people who have the greatest need.

And so I am not completely convinced by this idea that being able to raise prices is the right way to ration needed goods in situations like that. So I think that there is room to have anti-price-gouging laws in limited situations like that. So I agree with the vice president that, in temporary situations like that, it is called for, anti-price-gouging laws.

Demsas: But I think it’s a bit weird how much attention these sorts of solutions have gotten, given what we know about the minimal amount of impact they would have had on the broad inflation conversation.

Tedeschi: Yeah. That’s right. So that’s a great point, which is that what we’re talking about with these price-gouging laws is completely divorced from the pandemic experience, right? Yes—the pandemic was an emergency, but it was not a hurricane, right? This was a slow-burn emergency that happened over years, and the increase in pandemic grocery prices was not because of a grocery store raising prices in overnight chaos because there was a storm outside. It was because of a lot of other factors that happened over the course of months and years. And we have to disentangle them. They are complex, but it’s very different than what we’re talking about with these price-gouging laws.

Demsas: Yeah. Well, I feel like there’s an important amount of very clearly defining the debate that we’ve done here. And I think that what has caused such an overreaction against the Weber thesis is that some of the people who are using it are not doing that.

I mean, I think that there’s a New Yorker profile of her in which Zach Carter—who I like a lot, who’s a great journalist but—he writes that there’s a Kansas Fed study suggesting that markups could account for more than half of 2021 inflation. And if you look at that study, the very next sentence is the economist writing, “However, the timing and cross-industry patterns of markup growth are more consistent with firms raising prices in anticipation of future cost increases, rather than an increase in monopoly power or higher demand.” So I think that’s part of the broader problem here, is that people are not being very careful about how they’re using this.

Tedeschi: That’s right. And I’ve seen studies like that that. A lot of times—and not in the case of the Kansas City Fed, because those economists are very careful—but a lot of times what they’ll do is they’ll do simple decompositions of increases in prices based on corporate profits, for example, which are just basically, like, weighted decompositions based on corporate profits versus other parts of GDP accounting.

And those are nice, but those don’t tell you anything about the causal reasons why profits increase. Those are just weighted accounting exercises. They’re not causal models, and people abuse those all the time. And it was unfortunate that I couldn’t tweet much in the administration, because that was the No. 1 thing I wanted to yell about, and I had to be told by my boss, like, You can tweet about dumb things, but you can’t tweet about smart things. (Laughs.)

Demsas: Wow. It’s a very funny policy.

Well, I think our last and final question, always: What’s something that you once thought was a good idea but ended up only being good on paper?

Tedeschi: I don’t know if I ever thought this was a good idea but, you know, one thing that I think works really well on paper but wouldn’t work in reality—and that I think the pandemic convinced me wouldn’t work in reality—is something called “functional finance.” And I think that this goes to a very important issue, which is: why we have an independent federal reserve and why that is so important to inflation.

And so functional finance is something that follows very directly from Keynesian economics. It’s this idea of managing inflation and employment not with monetary policy but with fiscal policy, instead.

Demsas: Like raising taxes?

Tedeschi: Yes. So the classic way to do it is you could have a counter-cyclical tax that would rise when inflation is too high and then fall when inflation is too low. And in fact, the sophisticated version of this is you could have rules where it would automatically rise or fall, depending on economic conditions. That’s the truly sophisticated version of this.

Demsas: Man, this would be so unpopular.

Tedeschi: Right.

Demsas: There would be a populist leader rise up to end the tyranny of automatic-stabilizer tax.

Tedeschi: I’m getting to it. I’m getting to this. So the idea of having a sales tax that is divorced from democracy, that just automatically changes in response to economic conditions, just, I guess as a citizen, bothers me at one level. And— I don’t know—something bothers me about having a hard-and-fast mechanical rule that can hurt people and put people out of work.

Demsas: Well, Ernie, thank you so much for coming on the show. This has been a great conversation.

Tedeschi: Thank you. I loved it.

[Music]

Demsas: Good on Paper is produced by Jinae West. It was edited by Dave Shaw, fact-checked by Ena Alvarado, and engineered by Erica Huang. Our theme music is composed by Rob Smierciak. Claudine Ebeid is the executive producer of Atlantic audio. Andrea Valdez is our managing editor.

And hey, if you like what you’re hearing, please leave us a rating and review on Apple Podcasts.

I’m Jerusalem Demsas, and we’ll see you next week.