If corporations can set any price they want, why does Aldi exist?
That question sounds flippant. It is not. It is the single most important question you can ask about the theory that corporate greed caused inflation. And the fact that most people cannot answer it tells you everything about why the theory survives despite the evidence.
Let me be clear about what I am not saying. I am not saying corporations are virtuous. They are not. They exist to maximize profit, and they will push prices as high as the market allows. The question is what constrains them. The answer is competition. And the greedflation story systematically ignores that constraint.
What the Theory Claims
The greedflation narrative goes like this: during the post-COVID inflation, corporations saw an opportunity. They raised prices faster than their costs increased, pocketing the difference as extra profit. The inflation was not caused by supply chains or energy prices or monetary policy. It was caused by corporate avarice.
This story is satisfying. It has a villain you can name. It fits the pattern of grievance that Anna wrote about in The Grievance Machine, Part I: identify a problem, name a bad actor, demand state intervention. The proposed solution follows the same pattern: price controls, excess profit taxes, more regulation.
The problem is that the evidence does not support it.
The Aldi Test
Supermarkets operate on razor-thin margins. In the US, the average grocery margin is between 1 and 3 percent. In the UK, the four largest supermarkets reported margins of 2 to 4 percent during the inflation period. These are not the margins of an industry that can set prices arbitrarily.
If supermarkets could charge whatever they wanted, there would be no Aldi. No Lidl. No discount grocery stores at all. The existence of discount retailers is direct evidence that margins are constrained by competition. Aldi does not exist because it is more virtuous than Tesco. It exists because customers will walk to a cheaper store, and the threat of that walk forces every store to keep prices in check.
This is not subtle. This is basic economics. Notes: Markets explains how competition forces prices toward cost. If one firm tries to gouge customers, another firm can undercut it and capture its business. The threat of that undercutting constrains prices even when no firm actually does it.
What Actually Happened
The post-COVID inflation was driven by real cost increases. Energy prices spiked after the Russian invasion of Ukraine. Shipping costs multiplied as supply chains seized up. Labor costs rose as workers demanded higher wages. Currency fluctuations made imports more expensive. Regulations added compliance costs.
These upstream cost increases passed through to consumers. They had to. A business that absorbs a 20 percent increase in energy costs and a 15 percent increase in shipping costs cannot survive without raising prices. The evidence shows that pass-through rates were high - meaning most of the cost increase showed up in prices.
Did profit margins expand during this period? In some sectors, yes. But the timing matters. Margins expanded because firms could pass through cost increases, not because they initiated them. When input costs stabilized, margins came back down. This is consistent with competitive markets adjusting to a cost shock, not with a coordinated gouging campaign.
The cross-country evidence reinforces this. Countries with more concentrated retail sectors (Australia) and less concentrated ones (Germany) both experienced inflation. Countries with price controls (Argentina, Venezuela) experienced worse inflation and shortages. This pattern does not fit the greedflation story.
The Real Villain
If corporate greed did not cause inflation, what did? The answer is less dramatic but more honest: a combination of fiscal stimulus, loose monetary policy, supply chain disruptions, and energy price shocks. Governments printed money. Central banks kept interest rates low for too long. The pandemic broke global logistics. War in Europe disrupted energy markets.
None of these causes has a single villain you can point to. There is no boardroom where executives decided to make life expensive. There is only a complex system of interacting forces that produced a result nobody wanted. The greedflation story is popular precisely because it replaces this complexity with a simple narrative. That simple narrative is wrong.
The proposed solution - price controls - was tried in the 1970s under President Nixon. It caused shortages, empty shelves, black markets, and rationing. The policy failed, was abandoned, and is now being proposed again by people who either do not know this history or do not care. Anna covered this in more detail in Price Controls: A Lesson We Keep Unlearning and How Prices Work.
What This Means
The greedflation theory does not survive contact with basic economics. Competition constrains prices. Margins were thin before inflation, thin during inflation, and thin after. The cost increases that drove inflation were real and came from outside the retail sector. Price controls would repeat the failures of the 1970s.
None of this means you should not be angry about higher prices. You should be. Inflation hurts. It devalues savings, squeezes budgets, and creates uncertainty. But being angry at the wrong cause leads to policies that make things worse, not better.
The next time someone tells you that corporate greed caused inflation, ask one question. If they could set any price they wanted, why did they not do it before?