“Negative reported sentiment may make consumers more vulnerable to profit-led inflation,” Paul Donovan, chief economist at UBS, wrote in a note Friday. “Profit-led inflation episodes occur when consumers are told a story about why price increases are necessary. Consumers’ willingness to believe the story allows some companies to sneak in a profit margin increase.”

Is greedflation real?

What Donovan refers to as “profit-led inflation” is also known as greedflation. Unlike normal inflation, which stems from imbalances in supply and demand, greedflation happens when companies take advantage of economic conditions to improve their margins by raising prices under the cover of other inflationary factors. In the U.S., the U.K., and Europe, companies have raised prices citing higher raw material costs as a result of the pandemic and the war in Ukraine, but corporate profits have nonetheless surged to record highs over the past year.

Donovan argued that not only is greedflation real, it has a disproportionate effect depending on how consumers feel about the economy. In the U.S., Republicans have soured against the Biden administration’s economic policies, with only 8% of Republicans reporting they were somewhat or very confident Biden could make good decisions on economic policy compared with 69% of Democrats, according to an April Pew survey.

Isabella Weber of the University of Massachusetts, Amherst, was one of the first economists to call out corporate greed as an underlying force behind inflation in 2021. While she was largely criticized for her views by fellow economists at the time, she has been winning the debate of late. Several months after Weber’s research, a study from the left-leaning Economic Policy Institute found that more than half of inflation since mid-2020 could be attributed to larger corporate profit margins. Former Fed vice chair Lael Brainard was more recently a key establishment figure in validating the theory, as she called attention to a “price-price spiral” that could be causing inflation. Last month, Albert Edwards, chief global strategist at 159-year-old bank Société Générale, took it a step further, saying the “astonishing” amount of “greedflation” was prompting him to think “we may be looking at the end of capitalism.” 

Pessimism and a lack of faith in government can make consumers more vulnerable and likely to accept corporations’ narratives that higher prices are inevitable, UBS’s Donovan argues off the back of this groundswell against greedflation. 

“If some consumers are inclined to believe that everything in the economy is bad, they are likely to be more accepting of stories about the necessity of raising prices. ‘Of course prices are going up. What else do you expect with this government?’ becomes an accepted narrative,” he wrote.

To be sure, the shoe was on the other foot just a few years ago. In 2019, polls showed that 97% of Republicans were happy with current economic conditions compared with 62% of Democrats. And the Trump economy was objectively good in several ways. The S&P 500’s annualized returns grew 13.7% during Trump’s term in office, the third-fastest growth any president has overseen since 1929, behind Democrats Bill Clinton and Barack Obama. The divergence continued during the early days of the pandemic in 2020, when many Republican voters cited stock market gains as the reason behind their approval of Trump, despite the fact only around half of Americans own any stock at all. 

And Trump was somewhat revolutionary in a macroeconomic sense, as he publicly campaigned for interest rates to remain low and continue fostering economic growth, with economists surprised that inflation didn’t get out of control as the economy “ran hot.” That looks a bit different a few years later, as inflation has hit several 40-year highs amid the pandemic, and some observers, including some Republicans, have argued that in retrospect, Trump’s strategy contributed to the inflation surge since 2021.

Donovan, for his part, is astonished by the Michigan survey. “The detail is hilarious. Michigan sentiment data identifies the reported sentiment of Republicans and Democrats; the two groups appear to be living on different planets. If your party is out of the White House, all is doom and despondency. If your party is in the White House, the U.S. economy is a perfect paradise,” Donovan wrote.

Federal Reserve Chair Jerome Powell and many other economists have long argued that rising wages, not fatter profits, are the root cause behind high prices, with former Treasury Secretary Larry Summers struggling to respond to Jon Stewart’s questions on the topic during a March interview. But despite the pushback, the greedflation argument is gathering steam. 

Donovan wrote in a March report that we are in the last of three inflationary waves to have hit since the pandemic. The first two stemmed from supply-chain snarls and temporary disruption—the traditionally held causes of inflation—but fatter profit margins are fueling the current one. 

Donovan wrote that companies are able to spin their own stories in the current inflationary environment, and are buoyed by political division and disdain for the government. He added that the Fed’s demand-side prescription for inflation of higher interest rates could eventually resolve the problem, but it would be a “crude and unnecessarily destructive policy approach,” while convincing consumers that they do not have to passively accept companies’ yarns of burdensome price increases might be a more effective strategy.