With the CPI inflation reaching 4.81 per cent in June 2023, terms like “greed-flation” and “wage-flation” have emerged in the Indian lexicon too. These are influenced by more developed economies like US & Europe.
The RBI in its July, state of the economy report, acknowledges that businesses worldwide, which were driving up inflation by flexing pricing power and jacking up output prices more than input costs – or greedflation will now face narrowing profit margins as wage pressure rises and drive-up prices – wageflation.
What do they mean?
Inflation, traditionally understood as a sustained increase in general price levels, can be driven by various factors, such as increased demand, supply disruptions or government policies. However, greedflation introduces an additional element: uncontrolled greed. Market participants, driven by insatiable greed, exploit loopholes, manipulate prices and engage in speculative activities, leading to a self-perpetuating cycle of rising prices. Let us put it this way: when the production cost of a pencil increased from Rs 10 to Rs 12, the selling price of the pencil rises from Rs 15 to Rs 18. However, when the price is increased to Rs 25 with the same amount of rise in production cost, the price hike seems to primarily contribute to an increased profit margin. But then isn’t maximising profits the motive of corporates?
Wageflation, on the other hand, refers to a situation in which wages rise at a high rate alongside or even faster than the rate of inflation. It occurs when wages increase without corresponding productivity gains, resulting in higher labour costs for employers. Wage also leads to overall cost increases and subsequent price surges.
The consequences of greedflation are significant, exacerbating wealth disparities and widening the gap between the rich and the poor. This can potentially lead to a loss of societal cohesion. Furthermore, greed-driven practices undermine investor confidence and erode trust in corporations. On the other hand, wageflation arises as a response to mitigate the impact of rising prices, yet it perpetuates a cycle of increased costs and reduced purchasing power for consumers.
The Indian context
While the pandemic can be a starting point of these, in the Indian context, it is pertinent to note that with the onset of the monsoon, there is a shift in the growth trajectory, accompanied by sporadic price increases that contribute to firming up headline inflation, as seen in the June 2023 reading. Basically, tomatoes have become expensive on account of crop damage due to inclement weather and pest attacks in the major production belts and not greed or rise in wages. Now that we’ve dealt with the elephant in the room, we can move ahead with the rest of the economy.
Food inflation increased to 4.6 per cent in June from 3.3 per cent in May as inflation in sub-groups such as spices and pulses witnessed a spike. There is a fear of spillover from tomato price spikes to prices of other commodities. But overall, the inflation levels are not very alarming. The Purchasing Managers’ Index for June 2023 indicated an increase in input costs in the manufacturing sector while they moderated for services sector. Selling prices, however, edged up further.
Looking at profits, the Nifty500 companies grew at a slower pace of 8.7 per cent YoY in FY23 after surging 49 per cent YoY in FY22 and 50 per cent YoY in FY21, said a report by brokerage firm Motilal Oswal Financial Services. Keeping aside the growth rates for a while, let us look at the growth rates post the pandemic which are as high as 50 per cent but this can be easily attributed to an increase in demand as economies opened and people had occasion to spend.
Wageflation in India is highly improbable given the excess supply of labour but greedflation is worrisome, if it ever hits the shore. In a country where over one-fourth of the population lives below the poverty line and a humongous middle class that lives pay check to pay check, a rise in prices is in itself a crisis. And if this crisis is fuelled by the insatiable greed, things will only get worse. By the looks of it, the phenomenon has not entered the Indian markets.
