The Pomp Letter
The Pomp Letter
Price Gouging, Price Controls, And Inflation

Price Gouging, Price Controls, And Inflation


To investors,

It is no secret that Turkey is experiencing painfully high levels of inflation right now. Economists’ expectations for inflation numbers in December are just over 30%, which includes estimations that range from 26% to 37%. Regardless of where the number officially ends up, the inflation that Turkish citizens are dealing with is hard to comprehend for investors in the developed, western world.

Governments are not thrilled in these scenarios to take responsibility due to previous monetary or fiscal decisions. Instead, they historically blame corporations for price gouging, implement price controls, and even institute capital controls in the most extreme examples. The higher the inflation gets, the more severe the government’s response tends to be.

The United States is experiencing nearly 7% inflation and we see our politicians calling out various industries, from beef producers to grocery stores, in regards to alleged price gouging. If history serves as a guide, it is unlikely that the corporations are actually price gouging. It is much more likely that their labor and material costs have drastically increased, so they need to raise their prices in order to still have any profit.

Turkey has already gone one step further than the United States though. They are not only accusing corporations of price gouging, but they are actually using the police to enforce a form of price controls. Here is a video that was released by the local authorities that shows them in various grocery stores.

The second tweet is translated by Google as saying:

“As Polatlı Municipality, we continue our strict controls against exorbitant prices. In these difficult days, our fellow citizens; We will always be against those who are not on the side of the poor and the poor.”

This reminds me of the classic “I am from the government and I am here to help you.” Obviously, these grocery store owners are unlikely to hike prices for the fun of it. They are dealing with a high inflation environment that has only become worse through 2021. If you put yourself in their position, I’m not sure there is much to do other than to continue to increase prices at the same rate as the devaluation of the currency.

The scary part of this video is that you have the police intervening in markets, which obviously doesn’t allow for free market forces to take hold. You can’t have a system of supply and demand if you also have artificial constraints on the market. As we know from history, these types of price and capital controls can actually exacerbate the situation, rather than help to fix it. Regardless, this is a nasty situation for business owners and citizens alike.

Let’s bring it back to the United States though. Politicians who have accused grocery stores domestically of price gouging have not looked at the numbers it appears.

We can use Kroger as one example of what the actual financials are telling us:

Not only is Kroger actually making less money this year, even though food prices are 5-6% higher based on the national average, but the business is also operating on a measly 2.4% profit margin. Those razor thin margins mean that the business must be insanely accurate at predicting supply chain and labor costs, along with any changes to demand.

Whether we are talking about the United States, Turkey, or many other countries around the world, business owners are facing significantly higher inflation than usual. They are going to have to raise prices. This is how capitalism and free markets work. We shouldn’t allow politicians and central bankers to gaslight us. A large portion of the problem stems from undisciplined monetary and fiscal policy. The market intervention is not a solution.

Besides ensuring that we are educated on how markets work and what the financials of these businesses are, it is important to focus on another simple idea as well:

High inflation erases hope for the most financially vulnerable in a society. Politicians attack corporations and business owners in response, which demonizes success. These are some of the ingredients of how societies crumble. It doesn’t have to be this way though. The popular saying of “money is the root of all evil” can be slightly changed to be more accurate — “fiat money is the root of all problems.”

Fix the money, fix the world. Billions of people around the world stand to benefit from a global store of value that can’t be debased or devalued by any one person, group, or government. We are well on our way to that solution. It can’t come fast enough for those living under high inflation though.

Hope you have a great start to your day. I’ll talk to everyone tomorrow.


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