"Inflation of Greed" in Greece is many times higher than in the eurozone as a whole

“Greed Inflation” (greadflation*) in Greece over the past four years has grown several times (5.5 times) compared to the eurozone, according to the quarterly report of the parliamentary budget office, published today by its head Ioannis Tsoukalas.

The figures above show that competition in the Greek market is not working, resulting in consumers bearing a disproportionate burden compared to other European countries due to business profits.

In particular, the bureau analyzed GDP inflation in its main components to draw conclusions about the contribution of labor costs and enterprise profits to its dynamics, especially during the pandemic and the war in Ukraine, which increased inflationary pressure. The analysis shows that profits contributed more than twice as much to the total growth of deflationary GDP by 2024 compared to labor costs. You can read the full text of the Office of the Budget report here.

Analysis

According to the analysis of the graphs below, it is obvious that for Greece, out of a total increase in inflation (GDP) of 16% during the reporting period (Q2 2019 – Q1 2024), the main contribution to inflation was made by profit (per unit of output) with a share of 9 %, while unit labor costs (reflecting wages and employer contributions) contributed 4.1% over the same period. In the eurozone over the same period, the budget office notes that unit labor costs, as opposed to unit profits, make a significant contribution to inflation – around 10%. At the same time, the contribution of profits in the eurozone was about 1.7%.

However, according to the bureau's analysis, earnings growth slowed significantly from Q1 2023 to Q1 2024, during which time the share of labor costs in GDP inflation was about twice as large as the share of profits. This analysis provides compelling evidence that firms – either through reduced competition or increased demand driven by increased household savings stocks and tourism – were able to pass on rising import costs to prices and significantly increase their profits, especially during periods of strong inflationary pressure.

U-turn

The strong contribution of profits to inflation in Greece appears to have been reversed over the past year, while the contribution of wage costs has instead increased. Of the total change in the GDP deflator of 2.8% for the reporting period, from the 1st quarter of 2023 to the 1st quarter of 2024, the share of labor costs explains about 1.65%, while the share of profits does not exceed 0.8%. This illustration strongly suggests that firms were able to pass on increased import costs to prices and increase their profits. According to a study by the ECB and the IMF, this phenomenon was observed throughout the eurozone during the first stage of the inflation shock, but with significant differences between member states.

Rising prices and inflation

The bureau's updated estimate puts the economy at an annual growth rate of 2.5% in 2024. The estimate is consistent with other updated forecasts recently published by the European Commission, the International Monetary Fund and the Bank of Greece. According to them, the annual growth rate of the Greek economy for 2024 ranges from 2.0 to 2.5%. On inflation, the department is maintaining its forecast at 2.8% for the full year.

Moreover, the outlook for the Greek economy in 2024 is positive and the Bureau expects the Greek economy to grow faster than the Eurozone economy. Slowing inflation, the gradual withdrawal of the European Central Bank (ECB) from monetary tightening, the continued successful withdrawal of the GFS from the banking sector and the impending shift to credit expansion, a strengthening investment base and very strong tourism growth are expected to support the growth of economic activity.

Uncertainties

However, the unstable external environment and, in particular, the recent political developments in France, increase uncertainty for the Greek economy. At the same time, long-term challenges remain. The Greek economy has a large investment gap to fill and the future environmental and productive impacts of climate change to cope with. This requires reforms and the effective use of the Recovery and Resilience Fund to accelerate investment and boost growth in both the short and, more importantly, the long term. On the fiscal side, while the positive impact of high inflation on government revenues should wane, the Office believes that the 2024 primary balance target of 2.1% of GDP is achievable, provided that one-off fiscal interventions are excluded and fiscal targets are strictly observed.

Why VAT Reduction Doesn't Work When Prices Fall

The prospect of reducing indirect taxes such as VAT, especially on consumer goods such as food, has also entered the public debate recently. The Bureau conducted a review of the international literature examining the impact of VAT on final consumer prices. After a thorough analysis of a large number of products in 27 Member States, EU Three interesting findings were made regarding the impact of VAT changes (fluctuations) on final consumer prices. First, only a small part of the VAT reduction, about 6%, is passed on to final prices, and only in the short term. In contrast, the VAT increase is reflected in final prices by about 34%. Moreover, the reintroduction of VAT rates leads to a disproportionate increase in prices, which is detrimental to the consumer.

Secondly, 10 months after the VAT reduction, consumer prices return to the level at which they were before the reduction. Third, the VAT cut appears to increase profit margins for businesses at the expense of consumers.

The first results of the study, conducted on the example of Spain, show that the almost complete skipping of the VAT cut in the first few months is significantly reduced during the quarter. Taking into account the above, as well as the competitive conditions in the Greek market compared to the Spanish one, the Authority considers that any impact on final consumer prices from the VAT cut in Greece, if any, will be smaller or much smaller and of shorter duration than in Spain. Taking into account the fiscal costs, the Authority considers that any proposed VAT cut is not an appropriate instrument to address the structural problem of price sticking.

On the contrary, as noted in the previous quarterly report, the agency believes that measures are needed to enhance competition by removing bureaucratic and other barriers to new businesses, and to empower and educate consumers through digital tools for comparing prices and product features so that they have sufficient information to make rational purchasing decisions.

*Gridflation – inflation of greed, Greedflation (from the words greed and inflation). A very good definition of what is happening. If the price of gas and wages have increased by 2 times, then entrepreneurs raise prices for their products by 3 times. Since entrepreneurs are those who look for opportunities everywhere, then under the sauce of “inflation is everywhere” they raise prices and reduce expenses in advance (due to automation and layoffs) + receive excess profits. And this further unwinds the inflation loop. Obviously, prices cannot be raised everywhere, but only where the market and conditions allow it (weak competition, monopoly, etc.)

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