With inflation more persistent in the UK than the eurozone, the Bank of England finds itself squarely in the crosshairs of public scrutiny. Rishi Sunak’s government looks set to fail on its promise to halve inflation this year too. Amid this backdrop, it’s tempting for both to deflect blame for high inflation. How convenient, then, that the International Monetary Fund (IMF) is the latest organisation to identify a scapegoat.

I’m referring to “greedflation” — the trendy tale that companies across sectors and countries woke up and decided to pad profits these past two years, so raising prices and entrenching inflation. The best version of this story goes that the pandemic and Ukraine war made supply-chain woes and rising energy costs salient with the public. This allowed corporations to conspire, tacitly, to raise prices beyond these cost increases, exploiting consumers who were expecting higher prices.

What’s the evidence? Greedflation proponents use basic accounting principles and aggregate figures as proof of causation. If profit on a unit of a good sold is the price minus unit costs, then we can rearrange the equation to get price equals cost plus profit. At the economy level, the corporate profit share of GDP has risen. Inflation rose, too. Can’t we say that profits were in some sense “driving” inflation? Businesses set their prices, after all, don’t they?

The IMF has enough respect for intellectual propriety to avoid endorsing that conclusion explicitly. But, prone as it is to jump on bandwagons, it alludes to it, saying “corporate profits were the largest contributor to Europe’s inflation over the past two years”. Gita Gopinath, its deputy managing director, again implied inflation was within businesses’ gift: “If inflation is to fall quickly, firms must allow their profit margins — which have shot up during the past two years — to decline.”

Here’s the problem: this story ain’t economics. Saying inflation went up because companies put up prices is a tautology. What matters is: why? What changed between 2020 and 2023 that brought bursts of inflation in the United States, European Union and UK? Was it really businesses capitalising on price confusion? Or, more conventionally, that rapid-demand growth, encouraged by loose monetary policy, mixed with supply shocks to drive up price levels?

The facts point towards supply and demand. Businesses can sell only to consumers willing and able to pay. If pasta suppliers suddenly raised prices, even the most extreme pasta lover with a fixed budget would have to reduce demand on other products to pay more, pushing down other prices. Tacit collusion in some industries, without some other force at play, can’t explain economy-wide inflation.

What can is more money in circulation, increasing consumers’ ability to pay. The Bank for International Settlements reminds us: “An upsurge in money growth preceded the inflation flare-up, and countries with stronger money growth saw markedly higher inflation.” As this money supply and pandemic spending filtered into a reopened economy, the UK’s money GDP (total spending) grew 7.6 per cent in 2021 and 9.7 per cent in 2022 (against a 2010–2019 annual average of 3.3 per cent). Unsurprisingly, inflation and output surged.

A temporary rise in profits is precisely what we’d expect as this higher spending pushed up against supply constraints, driving up prices. Not least because certain costs (such as wages) adjust slowly. So, no: it wasn’t “greed” driving inflation, but too much money. Even in November 2021, with consumer price index inflation at 5.1 per cent, the Monetary Policy Committee voted to keep the Bank rate at 0.1 per cent.

Supply factors pushed some corporations’ profits up, too. The Ukraine war reduced energy supplies and raised international prices, providing a windfall for domestic energy producers. Some firms raised prices pre-empting wage and raw material cost pressures, temporarily raising profits. Brexit changed some competitive conditions, too. If an EU exporter to the UK gave up producing a good for our market, British firms may have benefited. Whatever, this isn’t about “greed”.

Is it mere semantics to distinguish between firms facing supply-and-demand conditions that facilitate higher profits, as opposed to pulling wool over consumers’ eyes? No. For the two stories have profoundly different policy implications.

If temporary high profits resulted from too much spending, then monetary policy is at fault and reducing future inflation requires constraining the money supply (as we’ve done). If negative supply shocks drove profitability, then we really want to leave those high profit signals, to encourage new businesses to enter and resolve the bottlenecks.

If, on the other hand, corporations had suddenly felt empowered to raise prices across the economy and so caused inflation, kooky ideas such as price controls and governments scolding companies are legitimised.

The government and Bank seem to be drifting in that direction. Jeremy Hunt has asked regulators to review prices in the energy, utilities and telecoms sectors, as well as banks and supermarkets, to make sure firms aren’t taking advantage. Andrew Bailey, the Bank governor, said last week, “we can’t have companies seeking to rebuild profit margins”, if inflation were to fall.

It’s a truism that profits must fall for inflation to fall, if costs continue growing at today’s pace. Bailey is correct too that inflation will probably fall in the coming months. But he, like the IMF and government, talks as if companies’ greedy decisions, rather than monetary errors and supply shocks, shaped our present and will determine our future. That’s wrong and shameful.