Inflation affects every citizen, and while there are many detailed descriptions of why this economic condition exists, economists don’t really explain when inflation is due to verifiable shortages and demand increases or is due to plain-old greed.
Price gouging is the practice of raising prices beyond the level needed to replace the increased costs needed to manufacture new items.
Price gouging happens when inflation is commonplace or there is a deep shortage due to disasters, supply-chain breaks, and too much demand for a limited supply. But there are also other reasons, including greed.
Price Gouging in Action
The current increase in prices happened after the federal government’s unprecedented $4 trillion COVID-related subsidies to state and local government, corporations and individuals ended. This $4 trillion economic relief package, known as Coronavirus Aid, Relief, and Economic Security Act (CARES), and the American Rescue Plan, were done to resurrect the US economy. This relief package was more expensive than the cost of the war in Afghanistan.
In most cases, businesses were not even required to show how they were affected by the COVID pandemic in order to receive the $2.3 trillion in Federal money they received, according to the Washington Post.
Beginning in March 2020, the Federal Reserve and US Treasury began making loans to individuals and businesses (profit and non-profit) through its Main Street Lending Program. This extensive program ranged from payroll support to payments to individual businesses, as well as tax breaks, as well as new sources for corporate credit and commercial paper.
But these programs ended in about September 2021, and the federal subsidies to these corporations ended, businesses had to re-hire employees and ramp up operations to pre-COVID levels. To boost their bottom lines, many of these corporations that had the ability and discretion to raise prices did so, even as supply chains were opening and more goods were becoming available.
Economists may not be able to measure this self-serving process, but it is considered rational, but not necessarily ethical, economic behavior.
A Few Examples of Price Gouging
Here are a few examples from a big box hardware store in south Florida that illustrate this point.
Here are some professional-quality building tools (an impact wrench, titanium bits) that were in the process of having their prices literally raised overnight. The boxes were never moved and the contents of these items never changed.
These photos show the old prices and the new prices that were changed due to inflation and price increases ranging from 20% to 10%.
The problems are that these tools were on the shelves of the big-box hardware store for months. Prior to that, they were made in China about an estimated nine to 12 months before.
This means the completed and assembled tools in these packages were produced about 16 months ago when inflation was at about 5% versus the current level of 10.3%.
This also means all the inflationary costs were literally built into the prices of these tools about one year earlier. So, why did these prices literally rise overnight?
Greed is not a formal term used by academic economists, but price gouging is as old as the study of economics. So, while this example does not single out a specific manufacturer or line of products, its shows that not all inflation is equal. Much of it is due to unregulated capitalism.
Sometimes there are legitimate reasons for raising prices due to supply chain disruptions and commodity shortages. In other cases, corporate executives see an opportunity and can charge higher prices simply because they can with a few keystrokes.