A European Central Bank staff paper published today says bigger company profits are driving inflation more than higher wages.
The paper – “How tit-for-tat inflation can make everyone poorer” – makes clear that both higher wages and higher profit margins are pushing up prices in the euro area.
This is in response to higher energy prices and problems in supply chains, which have also pushed up the cost of raw materials.
It warns this “tit-for-tat” dynamic “must be avoided to keep inflation at bay”.
The ECB uses a measure of inflation, called the GDP deflator, to show that across the euro area as a whole, profits went up 9.4% in the fourth quarter of 2022 while labour costs went up by 4.7%.
It calculates that profits contributed more than half the domestic price pressures in the euro area while wages contributed less than half.
It says that historically, from 1999-2022, profits made up around a third of the GDP deflator but this has risen to two thirds in 2022.
The paper speculates that high input prices, like energy, have “made it easier for firms to increase their profit margins, because they make it harder to tell whether higher prices are caused by higher costs or higher margins.”
The paper finds that since the start of last year, profits have risen faster than wages.
It focuses on sectors such as agriculture, energy and utilities, construction, manufacturing and some services.
It says demand has remained strong for certain goods and services which have been restricted in some ways as a result of the fallout from Covid. This has enabled prices to be pushed higher.
Today’s paper says that if the growth in profits and wages does not slow down, it will make the ECB’s job of getting back to its 2% inflation target harder.
It goes on to say that may require “a stronger policy response”, which in plain terms indicates even higher interest rates.
The paper does say ECB staff expect profits and wages to grow more slowly over the next three years as demand calms down and inflation starts to decline.
They also expect some of the mismatches between demand and supply chains to work themselves out.
Article Source: Company profits driving up inflation more than higher wages – ECB – Robert Shortt – RTE