Phillip Inman
THE GUARDIAN
Tue, 27 June 2023
Corporate profits were the biggest factor driving up prices last year and will be again in 2023 unless businesses are forced to absorb rising wage bills, the head of the European Central Bank has said.
Outlining how the ECB plans to tackle inflation across the 20-member eurozone, Christine Lagarde said she was concerned that firms would again “test” consumers’ appetite for paying higher prices despite a steep decline in most business costs in recent months.
In a speech at a central banking conference in Portugal, the central bank president said workers were expected to recover the value of their pre-pandemic wages over the next two years, but if companies passed these rises to consumers through higher prices, inflation would persist for longer than currently expected and remain above the ECB’s 2% target.
Warning that there may need to be more interest rate rises this year, Lagarde’s comments were supported by the deputy chief of the International Monetary Fund, speaking at the same conference, who said there was a risk of “inflation getting entrenched”.
Gita Gopinath, who was until last year the IMF’s lead economist, said in her speech that the ECB and other central banks “should be prepared to react forcefully” to signs of persistent inflation, despite concerns that higher borrowing costs could increase unemployment and cause a recession in many countries.
In a study of inflation across European countries, IMF researchers said their findings showed corporate profits had played a significant role in pushing inflation higher across Europe, supporting Lagarde’s concerns.
Citing research by Isabella Weber at the University of Massachusetts, the IMF said: “Rising corporate profits account for almost half the increase in Europe’s inflation over the past two years as companies increased prices by more than spiking costs of imported energy.
“Now that workers are pushing for pay rises to recoup lost purchasing power, companies may have to accept a smaller profit share if inflation is to remain on track to reach the European Central Bank’s 2% target in 2025.
Annual consumer prices in the eurozone rose 6.1% in May, down from 7% in April, while the UK’s inflation rate in May remained steady at 8.7%.
Lagarde said the ECB expected eurozone workers to claw back their earnings losses from inflation by the end of 2025. This would mean a 14% increase in wages over two years.
She said: “During previous [financial] shocks in the euro area, firms had tended to absorb rising costs in profit margins, as slower growth made consumers less willing to tolerate price hikes. But the special conditions we experienced last year turned this regularity on its head.
“The sheer scale of input cost growth made it harder for consumers to judge whether price hikes were caused by higher costs or higher profits, fuelling a faster and stronger pass-through.
“At the same time, pent-up demand in reopening sectors, excess savings, expansionary [government] policies and supply restrictions brought on by bottlenecks gave firms more scope to test consumer demand with higher prices.”
She said corporate profits accounted for about two-thirds of inflation in 2022 compared with the average over the previous 20 years of one-third.
“This in turn led to the shocks feeding into inflation [last year] much more quickly and forcefully than in the past,” she said. To keep inflation low, “we need to ensure that firms absorb rising labour costs in margins”.
Without a shift in corporate behaviour, interest rates would need to stay higher for a longer period than previously forecast, Lagarde said.
“If firms were to regain 25% of the lost profit margin that our projections foresee, inflation in 2025 would be substantially higher than the baseline – at almost 3%,” she added.
The Bank of England has yet to produce a study calculating the influence of corporate behaviour on inflation and says it has no plans to embark on a similar study to the one carried out by the ECB.
The Unite union said the IMF study confirmed research it carried out last year into the impact of rising corporate profits on UK inflation.
Tue, 27 June 2023
Corporate profits were the biggest factor driving up prices last year and will be again in 2023 unless businesses are forced to absorb rising wage bills, the head of the European Central Bank has said.
Outlining how the ECB plans to tackle inflation across the 20-member eurozone, Christine Lagarde said she was concerned that firms would again “test” consumers’ appetite for paying higher prices despite a steep decline in most business costs in recent months.
In a speech at a central banking conference in Portugal, the central bank president said workers were expected to recover the value of their pre-pandemic wages over the next two years, but if companies passed these rises to consumers through higher prices, inflation would persist for longer than currently expected and remain above the ECB’s 2% target.
Warning that there may need to be more interest rate rises this year, Lagarde’s comments were supported by the deputy chief of the International Monetary Fund, speaking at the same conference, who said there was a risk of “inflation getting entrenched”.
Gita Gopinath, who was until last year the IMF’s lead economist, said in her speech that the ECB and other central banks “should be prepared to react forcefully” to signs of persistent inflation, despite concerns that higher borrowing costs could increase unemployment and cause a recession in many countries.
In a study of inflation across European countries, IMF researchers said their findings showed corporate profits had played a significant role in pushing inflation higher across Europe, supporting Lagarde’s concerns.
Citing research by Isabella Weber at the University of Massachusetts, the IMF said: “Rising corporate profits account for almost half the increase in Europe’s inflation over the past two years as companies increased prices by more than spiking costs of imported energy.
“Now that workers are pushing for pay rises to recoup lost purchasing power, companies may have to accept a smaller profit share if inflation is to remain on track to reach the European Central Bank’s 2% target in 2025.
Annual consumer prices in the eurozone rose 6.1% in May, down from 7% in April, while the UK’s inflation rate in May remained steady at 8.7%.
Lagarde said the ECB expected eurozone workers to claw back their earnings losses from inflation by the end of 2025. This would mean a 14% increase in wages over two years.
She said: “During previous [financial] shocks in the euro area, firms had tended to absorb rising costs in profit margins, as slower growth made consumers less willing to tolerate price hikes. But the special conditions we experienced last year turned this regularity on its head.
“The sheer scale of input cost growth made it harder for consumers to judge whether price hikes were caused by higher costs or higher profits, fuelling a faster and stronger pass-through.
“At the same time, pent-up demand in reopening sectors, excess savings, expansionary [government] policies and supply restrictions brought on by bottlenecks gave firms more scope to test consumer demand with higher prices.”
She said corporate profits accounted for about two-thirds of inflation in 2022 compared with the average over the previous 20 years of one-third.
“This in turn led to the shocks feeding into inflation [last year] much more quickly and forcefully than in the past,” she said. To keep inflation low, “we need to ensure that firms absorb rising labour costs in margins”.
Without a shift in corporate behaviour, interest rates would need to stay higher for a longer period than previously forecast, Lagarde said.
“If firms were to regain 25% of the lost profit margin that our projections foresee, inflation in 2025 would be substantially higher than the baseline – at almost 3%,” she added.
The Bank of England has yet to produce a study calculating the influence of corporate behaviour on inflation and says it has no plans to embark on a similar study to the one carried out by the ECB.
The Unite union said the IMF study confirmed research it carried out last year into the impact of rising corporate profits on UK inflation.
Inflation crisis driven by rising corporate profits, claims IMF
Szu Ping Chan
Mon, 26 June 2023
IMF's Gita Gopinath said firms should allow their profit margins to decline to bring down inflation - Jason Alden/Bloomberg
Rising corporate profits played a bigger role in driving Europe’s inflation crisis than the energy shock caused by the war in Ukraine, according to analysis by the International Monetary Fund (IMF).
Profit increases accounted for almost half the increase in the eurozone’s post-pandemic inflation rate, according to research by IMF staff, as “companies increased prices by more than spiking costs of imported energy”.
The research is likely to be seized on by trade unions as evidence of “greedflation” as they demand pay rises for their members.
Gita Gopinath, the IMF’s deputy managing director, urged companies to abandon efforts to protect their margins in the face of higher costs.
Speaking at a conference in Sintra, Portugal, she said: “If inflation is to fall quickly, firms must allow their profit margins—which have shot up during the past two years—to decline and absorb some of the expected rise in labour costs.”
It comes after a string of British companies reported increased profits in the past few months.
On Monday, Primark owner Associated British Foods (ABF) raised its outlook for the year on Monday as it said shoppers had absorbed price increases for food and clothing.
The company said the value of its sales was up 16pc in the quarter to May 27, even though the volume of goods sold was close to flat.
Eoin Tonge, finance director, insisted the business had still sacrificed some profitability even with these increases. He said: “We didn’t raise prices in line with inflation. We chose to completely banjax our margins so that we could stay true to our consumers.”
Separate figures showed food inflation eased for a second month as supermarkets cut the price of household staples, in what economists said suggested prices in the shop have peaked.
Shop price inflation overall slowed to 8.4pc in June, down from 9pc in May, according to the British Retail Consortium.
Food inflation slowed to 14.6pc in June, down from 15.4pc in May in the second consecutive deceleration in the food category.
Ms Gopinath said that history suggested that workers were also likely to ramp up pay demands in an attempt to protect living standards. She said: “Some wage catch-up is to be expected.”
IMF researchers Niels-Jakob Hansen, Frederik Toscani and Jing Zhou added that if pay increased by the 5.5pc rate needed to guide real wages back to their pre-pandemic level by the end of next year, companies’ profit share would have to drop to its lowest level since the mid-1990s for inflation to return to target.
Ms Gopinath warned that companies are likely to resist any declines in profits, “especially if the economy remains resilient, while workers may demand payback for their real wage losses.
Such dynamics would slow inflation reduction and likely feed into expectations and increase susceptibility to further upside cost or resource pressures”.
Sainsbury’s announced this week that it will plough £15m into cutting prices of its own-branded products from Tuesday alongside cuts in the price of jam, honey and cornflakes. Prices of chicken breasts will also be matched to Aldi for the first time.
Szu Ping Chan
Mon, 26 June 2023
IMF's Gita Gopinath said firms should allow their profit margins to decline to bring down inflation - Jason Alden/Bloomberg
Rising corporate profits played a bigger role in driving Europe’s inflation crisis than the energy shock caused by the war in Ukraine, according to analysis by the International Monetary Fund (IMF).
Profit increases accounted for almost half the increase in the eurozone’s post-pandemic inflation rate, according to research by IMF staff, as “companies increased prices by more than spiking costs of imported energy”.
The research is likely to be seized on by trade unions as evidence of “greedflation” as they demand pay rises for their members.
Gita Gopinath, the IMF’s deputy managing director, urged companies to abandon efforts to protect their margins in the face of higher costs.
Speaking at a conference in Sintra, Portugal, she said: “If inflation is to fall quickly, firms must allow their profit margins—which have shot up during the past two years—to decline and absorb some of the expected rise in labour costs.”
It comes after a string of British companies reported increased profits in the past few months.
On Monday, Primark owner Associated British Foods (ABF) raised its outlook for the year on Monday as it said shoppers had absorbed price increases for food and clothing.
The company said the value of its sales was up 16pc in the quarter to May 27, even though the volume of goods sold was close to flat.
Eoin Tonge, finance director, insisted the business had still sacrificed some profitability even with these increases. He said: “We didn’t raise prices in line with inflation. We chose to completely banjax our margins so that we could stay true to our consumers.”
Separate figures showed food inflation eased for a second month as supermarkets cut the price of household staples, in what economists said suggested prices in the shop have peaked.
Shop price inflation overall slowed to 8.4pc in June, down from 9pc in May, according to the British Retail Consortium.
Food inflation slowed to 14.6pc in June, down from 15.4pc in May in the second consecutive deceleration in the food category.
Ms Gopinath said that history suggested that workers were also likely to ramp up pay demands in an attempt to protect living standards. She said: “Some wage catch-up is to be expected.”
IMF researchers Niels-Jakob Hansen, Frederik Toscani and Jing Zhou added that if pay increased by the 5.5pc rate needed to guide real wages back to their pre-pandemic level by the end of next year, companies’ profit share would have to drop to its lowest level since the mid-1990s for inflation to return to target.
Ms Gopinath warned that companies are likely to resist any declines in profits, “especially if the economy remains resilient, while workers may demand payback for their real wage losses.
Such dynamics would slow inflation reduction and likely feed into expectations and increase susceptibility to further upside cost or resource pressures”.
Sainsbury’s announced this week that it will plough £15m into cutting prices of its own-branded products from Tuesday alongside cuts in the price of jam, honey and cornflakes. Prices of chicken breasts will also be matched to Aldi for the first time.
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