‘Excess profits’ made by big firms boosted inflation – report

Rebecca Speare-Cole, PA sustainability reporter
Fri, 8 December 2023 



“Excess profits” made by large international companies could have exacerbated inflation and passed on higher costs to consumers, according to a report.

Researchers from the Institute for Public Policy Research (IPPR) and Common Wealth – both British think tanks – analysed the financial statements of 1,350 firms listed on the UK, US, German, Brazilian and South African stock markets.

They found that UK-listed firms such as Shell, Glencore, Vodafone and Barclays saw their profits outpace inflation following Russia’s invasion of Ukraine, while ordinary families’ real incomes plummeted.


The report, released on Thursday, argued that because energy and food prices feed so significantly into costs across all sectors of the wider economy, this exacerbated the initial price shock – contributing to inflation peaking higher and lasting longer than had there been less market power.

Firms in other sectors such as tech, telecommunications and finance also saw high profit increases, the report said.

The researchers cited work by University of Massachusetts assistant professor Isabella Weber, who has argued that profits in “systemically significant” sectors – such as energy and commodities – can have an outsized impact on inflation across the wider economy.

The report said that large companies in these sectors have been able to protect their profit margins or even increase them during the period of inflation, setting prices higher than are socially and economically beneficial, and generating “excess profits” through a combination of high market power and global market dynamics.

It noted that nominal profits averaged at least 30% higher at the end of 2022, compared to the end of 2019 before the pandemic.

It also found that in the UK, 90% of nominal profit increases during this period occurred in only 11% of publicly listed firms.

UK oil major Shell’s average annualised profit rose from £15 billion to £44 billion, while BP’s rose from £7.7 billion to £23 billion.

Oil and mining giant Glencore’s average annualised profits rose from £1.9 billion to £14.8 billion, while Rio Tinto saw its own rise from £9 billion to £15.5 billion.

Vodafone, British American Tobacco and British banks Barclays, Natwest and HSBC were also among the top 10 UK-listed companies which saw increased profits over the period.

Firms across the world in other sectors such as tech, telecommunications and finance also saw high profit increases, the researchers found.

The report said a rise in nominal profits does not mean that firms have raised their profit margins, since for many it is the result of passing on their higher costs to consumers while maintaining the same degree of profitability as a percentage of nominal sales.

But it added that there is evidence some stock market-listed firms not only protected their margins but also increased them, which meant they not only passed on inflation but further amplified it.

The researchers found that if companies accepted a hit to their profit margins, similar to that endured by wage earners, then “pass the parcel” inflation would decrease.

The think tanks are now calling for policymakers to deploy a much broader range of policy tools to dampen inflation caused by external shocks and prevent a repetition of profiteering from big companies.

They recommended a new international approach to taxing excess profits, which could form part of pro-investment tax reforms to reduce inefficient behaviour by dominant corporations and encourage productive investment instead.

The organisations also called for a new direction for competition policy to stop overly powerful companies from taking advantage of economic emergencies, and more interventions such as price caps and excess profits taxes to help stabilise markets during economic emergencies.

Carsten Jung, senior economist at IPPR, said: “Our research finds that markets aren’t working efficiently, enabling large companies to make profits that likely amplified inflation.

“This has made the cost of living crisis worse for most people, and for many smaller firms across the economy.

“The original inflation spike was driven by global supply chains gumming up post-pandemic, and then by the energy price shock following the Ukraine invasion.

“Now economists considering the knock-on effects of ‘home made’ inflation have been focussing too much on the labour market.

“We should be scrutinising the role profits have played in amplifying inflation.

“If external shocks are made worse by business behaviour then new policy tools are needed to tackle this.”

Chris Hayes, chief economist of Common Wealth, said: “Inflationary shocks cannot be avoided, but they need not persist so long.

“Our analysis of companies suggests many large firms, beyond just the commodities sector, are using their power to preserve their profit margins. This pushes the shocks downstream to workers, consumers and labour-intensive industries that are less able to absorb them.

“This is not only unfair but has destabilised the economy and undermined growth.

“We need a new set of targeted and strategic macroeconomic policies to encourage companies to behave differently and bring down inflation, both now and in the future.”