The replies to my post from August 18th on the topic of price gouging (Are More Price Gouging Laws Needed in the U.S.?) have been great and bring up some interesting points. Sentiment for a federal law to address exorbitant price hikes during times of disaster or a state of emergency has been expressed to set a national standard and to protect those who live in the thirteen states without price gouging laws. Others believe that this is a matter best left to the states. Let’s drill down a bit more into some of the factors…
The U.S. is in the midst of the highest inflation seen in four decades, with research from the Federal Reserve Bank of San Francisco (FRBSF) indicating supply constraints, made worse by the Ukraine war, account for about half of the surge in U.S. inflation, with demand currently making up a third of the increase. The FRBSF report concludes:
Because supply shocks raise prices and suppress economic activity, the prevalence of supply-related factors raises the risk of entering a period of low growth and elevated inflation levels. This risk depends crucially on how long labor shortages and global supply disruptions persist. While supply disruptions are widely expected to ease this year, this outcome is highly uncertain.
Growing federal and state budget deficits coupled with printing money to no end is also a contributing factor of the inflation gripping the economy. A Wall Street Journal story last September about the U.S. debt load exceeding the size of our economy (GDP) mentioned Congressional Budget Office projections that a rising debt-to-GDP trajectory is offset by low inflation and very low interest rates.
We all know that inflation is still rising and that more Fed rate hikes are expected.
Some point to a form of “greedflation” as a contributing cause of inflation. Greedflation is where big corporations seize on the inflation narrative to increase prices only to drive up profit margins, thus causing more inflation- and increasing their profit margins. This is the basis for the introduction of the Price Gouging Prevention Act of 2022. The legislation as written will outlaw a corporation from offering a good or service at an “unconscionably excessive price during an exceptional market shock”- the problem here is who exactly would determine when a price increase is “unconscionably excessive”?
Vague language in legislation risks a zealous federal bureaucrat or state attorney general will effectively conclude that ‘just because I don’t like high prices I call it gouging’. This will burden the economy with unnecessary regulatory expenses that may ironically add more costs- read inflation– for consumers. Even if a national standard of price gouging is needed, the Price Gouging Prevention Act of 2022 as written is probably not the answer.
In the end, prices are a function of supply and demand- it costs more to get a hotel at a ski resort during a snowy winter than during muddy season. The market, and the consumers who bring it to life, will take care of bad actors. Companies that try to raise prices too much run the risk that nimble competitors will rush in with better products at a lower cost- this is the reason why we see $59 airfare deals and flat screen TVs for $399.
With that said, predatory pricing is a problem, but I’ll save that topic for another post. Forcing a fake standard of price gouging is filled with political bias and should be avoided; it’s the proverbial hand on the scale.
The story below gives a good perspective on how supply and demand have affected pricing in our current economy- there are also good videos that go with it- one gives an overview of the story and the other gives a fun ‘crash course’ on inflation. Enjoy- and let me know what you think!
~ Brian Kasal- The Leadership Matrix
P.S.- Did you see my last Leadership Matrix post? The Fed and the Control of Inflation
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