'Excuseflation' Clashing with Traditional Economics

Photo by Emil Kalibradov on Unsplash

Due in part to excuseflation, inflation is currently at 6.4% which is more than an astounding 4% above the Federal Reserve’s target rate. The imbalance between supply and demand during and after COVID-19 can explain the high inflation that has occurred in the past couple of years, but why is that inflation still continuing now that COVID-19 has officially been declared as over?

The answer: Excuseflation

What is Excuseflation?

Excuseflation is a corporate strategy and reasoning that companies use to justify high price increases to their customers. Companies can use this reasoning in abrupt disruptions, such as COVID-19. Consumers think that it is logical for prices to go up since companies have higher expenses themselves that they have to address. 

Using Excuseflation, companies sell fewer products at higher prices: a monopolistic-like practice. You might think of monopolies in the sense of one huge company dominating an entire industry, but that is not the only way monopolies can occur. Supply bottlenecks, where there is a hindrance slowing down the supply chain, and abrupt disruptions as discussed before can also lead to monopoly power in an industry.

Take Pepsi, for instance, who has raised prices by around 16% in order to compensate for the losses they suffered in Russia after their invasion of Ukraine. Let’s analyze what should happen after if we follow traditional economic principles: consumers would eventually turn to alternate soda brands with lower prices and Pepsi would eventually decrease their prices in order to compete. However, in oligopoly style, where companies can act in accordance with each other, Pepsi and Coca-Cola (supposedly competitors) both have experienced an increase in their profit margins. When many companies in an industry experience higher total revenues with their higher price levels, price elasticity decreases. This means that consumers continue to buy a product that has a high price level instead of turning to a substitute product, therefore decreasing incentive for companies to decrease their price levels.

If companies do lower their prices, currently, it may initiate a price war. This occurrence can happen due to the temporary monopolies that have formed with the majority of firms in an industry acting similarly. As resource prices have increased for industries as a whole, companies in an industry have collectively increased their prices while still seeing profit. Companies can raise prices even higher than what would be necessary in order to maintain their current profit margins, making more profit than for themselves and decreasing consumer surplus. Lowering prices, on the other hand, can potentially ruin profitability terms as companies would continue lowering to match competition until the prices go past profitability levels. 

The only way for ‘excuseflation’ to go down is if companies are held accountable by their customers and/or if policymakers place regulations on the monopolistic practices taking place. Next time you see a price increase and assume it is due inflation, remember that it might not be the only reason.