Although appealing to dissatisfied consumers, the theory of price increases due to seller and producer greed, i.e., the pursuit of maximum profit („greedflation“) – is not substantiated by available financial data.
Through sectoral analysis of the financial reports of all companies in Serbia (click here for the full report) we concluded that out of 19.4% revenue growth of the economy in the period 2021-2022, 91%[1] can be directly explained by cost increases, while the remaining 9%[2] can be explained by profit increases; i.e. – greed could possibly be responsible for only one-eleventh of the total inflation.
Profit margin[3] was most increased by mining (by 47%), real estate operations (35%), entertainment and recreation – mostly betting shops (31%), agriculture (18%), and HORECA (15%).
The reasons for increased profitability in these activities are generally related to increased demand (150,000-200,000 people moved to Belgrade) which did have an impact on economically justified price increases.
It is also important to note that the decrease in profit in the electricity sector is a direct consequence of poor system management; in its absence, the sector, like the oil and coal sector, would have experienced profit growth – as a consequence of international trends in energy prices.
Meals in restaurants increased by 19% year-on-year as of December 2022. Approximately 15% of this (a price increase of 2.9%) can be attributed to efforts to increase profit, while the remaining 85% (a price increase of 16.1%) is the result of increased costs (food, wages, rent...). For example, coffee cost 150 dinars, and now it costs 178.5 – it increased by 28.5 dinars. Of this, 4.3 dinars relate to profit increase, and 24.2 to increased café costs.
The profit margin in trade did not increase, but the sector managed to pass on the entire increase in input prices to consumers, which indicates an undoubted presence of certain monopoly power. The data indicate that the trade margin[4] amounted to about 37% on average in both 2021 and 2022. This means that retail is not directly responsible for the increase in inflation.
However, the fact that traders managed to fully preserve their comparatively high trade margins by fully adjusting prices may indicate a problem of disproportionate distribution of power between traders, suppliers, and consumers.
. This is also supported by the fact that, measured by net return on capital of 15%, trade represents one of the most profitable activities in Serbia (the average for the economy is 9%).
Therefore, the introduced price limitation measures for certain products do not necessarily create market distortion, in terms of potential damage to suppliers and product shortages; they may even slightly limit that „power“. However, in developed market economies, it would be expected that such limitations do not occur through state intervention, but by enabling fair competition, which benefits consumers.
[1] 7 percentage points of the economy's revenue growth
[2] 7 percentage points of the economy's revenue growth
[3] Profit margin represents the share of profit in revenue. A higher profit margin means that a larger part of the company's revenue flows directly into profit.
[4] Trade margin is the difference between the price at which a trader buys a product and the price at which they sell it.
