Corporate profits and inflation | Business


For several months now, every time we go to the supermarket we have been helplessly watching the rise in the price of bread, pasta, milk… The same thing happens when we pay our gas and electricity bills. Disruptions in the supply and demand for goods and services caused by the pandemic and aggravated by the invasion of Ukraine have caused significant price increases not seen for decades, especially affecting food, raw materials and energy. According to the results of a survey launched on Twitter by Javier Aznar, which received 1,147 responses in early June, the number one cause of recent inflation is supply chain disruptions (55%), followed by fiscal/monetary policy (38%), the market power of companies (6%) and ESG strategies (1%, acronym in English for Environment, Social and Governance).

Let’s see what recent studies indicate. Ana Maria Santacreu and Jesse LaBelle, researchers at the Federal Reserve Bank of San Luis, show that in the United States a large part of the increase in industrial prices can be attributed to disruptions in supply chains, indicated as the first important factor in the Twitter survey, when there is a very strong increase in demand. On the other hand, Josh Bivens, director of research at the Economic Policy Institute in Washington (IPE), emphasizes the contribution of extraordinary corporate profits, which have skyrocketed since the beginning of the covid-19 crisis. 19, and whose growth is related to market power, the third factor in the aforementioned survey. He argues that it is possible that companies have increased their profit margins above what is necessary to cover the increases in costs, taking advantage of the current situation of rising prices of intermediate products.

Josh Bivens indicates in the IPE blog that the increase in profits has contributed around 54% of the total increase in prices from the beginning of the pandemic to April 2021, while disruptions in value chains represent 38 % and labor costs 6%. However, in the eurozone the story differs in that the rise in energy prices has contributed more than other factors to inflation, as Emilio Ontiveros recently pointed out in this newspaper, referring to imported inflation.

Data from the latest economic bulletin published by the European Central Bank indicates that year-on-year inflation in May 2022 was 8.1%, with energy prices 39% above their level in the previous year and those of food 7.5%. It also notes that there are many job vacancies, wage growth has started to pick up and inflation is expected to remain elevated throughout 2022, even excluding food and energy prices from the count. Surprisingly, corporate windfall profits are not referenced as a potential factor also contributing to price increases. In the European Union (EU) have not the profit margins of companies grown as much as in the United States? Let’s see. Although both company and industry data indicate that profit margins fell after the introduction of the euro, globally, there is evidence of a long-term upward trend in the manufacturing sector after 2010. economists De Loecker and Eeckhout, for a sample of 134 countries, 16 from the EU, in a recent academic publication.

In short, although the empirical evidence is incomplete and more recent data on company profit margins are required to draw conclusions about what happened after the pandemic, the potential relevance of increased concentration in some industrial sectors should not be ruled out in advance. with the consequent increase in market power and price fixing, as a candidate to contribute to inflation. For this reason, advocating for a tax on extraordinary profits, as has already been applied in Italy and announced in Spain for electricity companies, and recommended by the European Commission and the International Monetary Fund for energy, could also be considered for other sectors. Rapid increases in interest rates may not be enough to curb inflationary pressures in the medium term, if they are not accompanied by other measures.

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