Inflation: when greed drives prices up

“Food prices are not only increasing because of higher costs. The industry is suspected of excessive profit-taking. Should the state intervene?

You have to be able to afford to eat sweets. No product has recently risen in price as much as sugar. On average, consumers had to pay 71 percent more in April than in the same month last year. While the inflation rate in Germany is slowly slowing down somewhat – it is currently at 7.2 percent – food prices are continuing to rise sharply. In April they increased by an average of 17.2 percent compared to the same month last year. Dairy products, cereals and fish as well as jam and honey also became significantly more expensive.

The sometimes enormous price increases in supermarkets cannot be attributed solely to increased raw material prices and production costs. Various studies have shown that the profit striving of the corporations has also driven inflation in this country. As a result, some companies have been able to raise prices more than the costs might have necessitated and increase their profits. The debate over this has given rise to the term greed inflation. It is a serious accusation: the food industry and trade are really enriching themselves excessively, while consumers keep paying more?

It is not possible to examine precisely who benefits particularly from price increases, as many companies do not publish their business figures. Manufacturers' cost calculations for individual products and price negotiations with retailers are also not transparent. However, an analysis of the 70 largest European companies from the consumer goods industry that publish their business figures recently showed that larger manufacturing groups in particular were able to increase their profits last year. According to the evaluation, which the consulting firm Oliver Wyman prepared for the Handelsblatt, retailers were also able to increase their margins slightly.

"Hungry for Profits"

A study published by the credit insurer Allianz Trade at the end of April fits in with this. "Excessive profit-taking" by companies contributed "a small but significant part" to last year's food inflation, it said. The authors of the study point out that "more than a third of the recent increase in food prices" in Germany cannot be explained by traditional drivers such as raw material costs or the development of energy prices. Food manufacturers in particular are "hungry for profits". They would have raised prices much more than the retailers.

The motive behind it does not necessarily have to be greed. Uncertainty about the development of costs is also likely to have played a major role in the past year. Some companies have probably increased their prices as a precaution, assuming that they will have to buy more expensively in the future. In the meantime, however, the situation with energy and producer prices is no longer as dramatic as it was last year. On average, producer prices are still above the level of the previous year, but only by 4.1 percent. In April, the inflation rate fell for the seventh time in a row.

The food industry rejects the allegations of improper enrichment, and retailers also claim that they will pass on falling raw material prices to consumers. In the supermarket, however, there is still little sign of this, as economists observe. "The consumer prices for many foods are still high, while the producer prices in agriculture and the prices for primary products for the food industry have fallen again in many cases," says Joachim Ragnitz from the Ifo Institute. Milk and cooking oil, for example, are still comparatively expensive, although producers are already receiving less for them. "Obviously, profits have increased here."

Agricultural economist Stephan Cramon-Taubadel from the University of Göttingen takes a similar view. He points out that raw material prices are sometimes only a small part of the costs, for example with bread rolls. On average, the share of raw materials in consumer spending on food is just under a quarter. But Cramon-Taubadel also says: "The suspicion is that some companies are taking advantage of the situation to increase profit margins."

What helps against greed inflation?

The main victims are the consumers. Because wages are rising much more slowly than prices, people's purchasing power has declined. Last year real wages fell by four percent compared to 2021, it was the third decline in a row. However, the high inflation is also weakening the economy as a whole: Above all, falling consumer spending has led to economic output has shrunk for the second quarter in a row. For the first time since the beginning of the corona pandemic in 2020, the German economy is in a recession.

In order to relieve the burden on consumers, the opposition Left Party called for a price brake on food as a supplement to the electricity and gas price brake at the end of last year. And in view of the increased profit margins of companies, representatives of the governing parties have also recently expressed their alarm: "Anyone who only puts forward increased costs in order to increase their profits is acting indecently," said SPD leader Saskia Esken at the beginning of May. It is unacceptable that families have to skimp on food to make ends meet while companies keep prices high. But how can excessive price increases be prevented?

When it comes to price brakes for food, economists are rather skeptical. After all, most price increases are justified because costs have actually increased. "Price brakes are therefore difficult to implement and could increase bottlenecks in products," says the economist Ragnitz. He also considers excess profit taxes to be impractical. The threat of such taxes could deter companies from future price increases. However, they are difficult to align because a distinction must be made between justified and unjustified gains.

 Investment incentives must be maintained, which is why it should not be about completely preventing profits.

Consumer advocates call for more transparency

According to economists like Ragnitz and Cramon-Taubadel, the federal government should focus more on relieving people who are particularly suffering from inflation. In addition, the scientists see the competition guardians as having a duty, at least if there are price agreements. "In the past, the Bundeskartellamt has repeatedly examined parts of the agricultural market and the food industry and found various forms of collusion," says Cramon-Taubadel. Something similar can also be heard from the federal government. The Federal Cartel Office is fulfilling its watchdog function and observing market distortions very closely, the Federal Ministry of Economics recently emphasized in a statement. Only recently did the ministry introduce a law that would allow the authority to intervene more quickly in the market if competition were to be disrupted in certain areas. Consumer advocates see this as a step in the right direction.

However, high prices alone are not prohibited, as the head of the cartel office, Andreas Mundt, emphasized in the past. According to consumer advocates, more transparency could already help to prevent excessive price increases. "The pricing of food is an absolute black box," criticizes Bernhard Burdick from the consumer center in North Rhine-Westphalia. He advocates obliging grocers to report price data to a transparency agency to give consumers a better overview. The consumer advocate expects "that the food companies will be more reluctant to raise excessive prices if prices can be compared more easily."

"It would actually be good if we had more data available, for example to be able to determine regional price differences," says economist Ragnitz. However, the usefulness of a transparency register for consumers is limited as few have the time to go to different supermarkets to shop. At the same time, Ragnitz emphasizes the influence of consumers themselves on prices. He says: "Consumers can use their market power, compare prices and increasingly switch to cheaper products in order to strengthen competition."