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The worst inflation in four decades has proved quite the ride for consumers over the past two years, and recently, it’s even helped the unthinkable become increasingly mainstream. Some economists are asking: Are consumers actually getting ripped off? This once fringe economic hypothesis has captured headlines more and more this year amid persistent inflation, even if it usually goes by another name. After years of being labeled a conspiracy theory, some economists believe that “greedflation” or, to put it the way an early prognosticator defined it, “profit-led inflation,” is to blame for at least part of the recent rise in consumer prices.

The theory that corporations used the war and pandemic as an excuse to hike their profit margins, for a time supported only by progressive economists, has gained backing from the likes of Lael Brainard, a former Fed vice chair and current director of Joe Biden’s National Economic Council, and Albert Edwards, a global strategist at French investment bank Société Générale.

Inflation has been the financial story of the decade so far. When fiscal and monetary stimulus mixed with crippled supply chains at the start of the pandemic, it led to a supply-demand imbalance that kicked off the first major inflationary episode since the 1980s. And after Russia’s invasion of Ukraine began last February, an energy price shock only added to the pain for consumers. As measured by the consumer price index, year-over-year inflation in the U.S. rose to a four-decade high of 9.1% by last June. Those were the first two inflation waves, says Paul Donovan, UBS Global Wealth Management’s chief economist, and now we’re in the third, and that’s where we get to rising corporate profits.

Inflation has slowed with the help of consistent Federal Reserve interest rate hikes, but not all the way to the central bank’s 2% target. Donovan argues that greedflation, or what he calls “profit-led inflation,” can explain at least some of that phenomenon.

Three ‘waves’ of inflation

Donovan said Thursday that the three distinct “inflation waves” that hit the economy over the past few years were all caused by “very different things.”

“The first wave, which was about consumer durable goods, that was demand-led,” he explained in an interview with Yahoo Finance Thursday, pointing to the surge in demand caused by monetary and fiscal stimulus that came during pandemic lockdowns in the form of things like stimulus checks and near-zero interest rates.

The good news is, this first wave of inflation is over, according to Donovan, with durable goods prices falling in the U.S. in “outright deflation.” And the second wave of inflation, which was caused by the energy shock that came from the war in Ukraine, is fading, too, the economist said. Natural gas and oil prices surged after Russia invaded Ukraine, owing to the country’s status as a major energy exporter, but have since dropped dramatically.

“The third wave of inflation, the one we’re getting now, is this unusual profit-led inflation story,” Donovan went on to explain. “This occurs where firms towards the end of the supply chain, so that’s consumer facing companies or near consumer facing companies, increase margins and pretend it’s all due to costs and other factors. They sneak in a margin increase.”

Donovan was one of the first on Wall Street to argue that “profit-led” inflation has been a serious thorn in the side of the Fed as it tries to return price stability to the economy back in March. And on Thursday, he pointed to evidence for his view in the “rise in retail profits as a share of GDP.” Retail profits surged 86% between the first quarter of 2020 and the fourth quarter of 2022, according to Fed data, while GDP rose roughly 20% over the same period. That’s all consumer-facing greedflation.

“That’s one instance where we’re seeing this expansion of margin under the cover of, ‘Oh, it’s a general inflation problem, we can’t help it.’ But actually they’re expanding margin and basically persuading consumers to accept that,” he said.

Will social media end greedflation?

“Profit-led inflation” is likely to blame for some of the inflation the U.S. economy has experienced over the past few years, according to Donovan, but the good news is “it doesn’t last forever.”

“At some point either governments or consumers realize that this is going on. And they say, ‘Hold on, that’s not fair’…That’s exactly the point that we’re starting to get to now,” he said, warning that companies that continue raising prices to boost margins will damage their brands’ reputation, because they will be seen to be “cheating or unfairly treating the consumer.”

Donovan pointed to recent moves by French finance minister Bruno Le Maire, who secured a pledge from 75 major food companies to lower prices in the country last week after threatening financial sanctions. Le Maire has previously cited these firms’ “undue” profits amid falling commodity prices—the United Nations’ index of world food commodity prices hit a two-year low this month. Donovan noted that the Spanish and British governments are putting ”similar pressures” on corporations as well.

“So we’re starting to get to a point where this profit-led inflation is really coming under pressure. And those margins in the retail sectors, and near the retail sector, are going to start being squeezed,” he said.

Donovan went on to discuss how social media played a critical role in both the rise of profit-led inflation, and argued it will again feature in its coming downfall. With images of the war of Ukraine and stories about rising inflation front and center on social media feeds over the past few years, corporations had “excuses” or “cover” to raise prices without consumers pushing back. But now social media is working against them.

It can be damaging to brand reputation “if you’re being accused of profiteering, of excess margin, in a time when people are really suffering,” Donovan said, pointing to consistent greedflation stories amid falling real wage growth across the developed world for the past two years.

“So I think that social media can help inflame profit-led inflation by creating excuses that companies can use, but it can also work, by threatening brand values, to cause companies to rethink some of their pricing strategies,” he concluded.