Inflation, who benefits? Firms that raise prices (and forget to reduce them) – Corriere.it

From prim central bankers and trade unionists prone to public harangues, it’s not often you hear similar arguments. But, when it happens, one should ask a few questions. Why are the governor of the Bank of Italy Ignazio Visco, the Italian executive of the European Central Bank Fabio Panetta and the secretary general of the CGIL hitting the same key? They say: if inflation is too high in Europe (and in Italy) also because companies have raised their prices with the increase in raw materials, and then have forgotten to reduce them or at least interrupt the cycle of price increases when the cost of gas, oil, grain or copper are down. So in the current inflation there would be an element of opportunism that benefits some producers and affects consumers. Possible?

The position of the CGIL

The leader of the CGIL told me in the interview that the Courier posted on Saturday April 15th: one topic removed, it looks like a tab. Exaggerated profits are being made on the shopping cart, because in recent months production costs have fallen a lot – let’s think of the price of gas – while increases for families have continued to run. And again: Since the beginning of this wave of inflation, we have only heard of the risk that contract renewals will trigger a price-wage spiral. What has been seen differently: fixed wages and growing profits, which now do not withdraw increases even if companies produce at much lower costs than six months ago.

The observations of Visco and Panetta

In his last speeches

, Visco recalled the importance of the income policy promoted by Carlo Azeglio Ciampi thirty years ago. To get out of one of the many Italian crises (that of 1992), the then governor of the Bank of Italy Ciampi favored an agreement between companies and trade unions to contain the dynamics of prices. From what I understand, Visco also forcefully raised the issue at the table of the Governing Council of the ECB in Frankfurt. As for Panetta, he also spoke about it in a recent interview with New York Timeslooking at the whole euro area. There is much discussion of wage increases, said the central banker, as a factor that can trigger an inflationary spiral. But we’re probably not paying enough attention to the other component of incomes, which is profits, he added. And again: Given the economic situation, there could be ideal conditions for companies to increase prices and profits. It’s not for me to judge whether it’s right or not, Panetta continued, but he pointed out: Input costs are going down, while retail prices and profits are also going up. There is enough for a central banker to worry that there may be a rise in inflation, due to increased profits.

Firms that have increased returns

But right? We see. Because if true, then perhaps there is something that can be done to alleviate a loss of purchasing power of employees that in the last two years is worth at least 15%: a cut in the real value of wages and salaries with very few historical precedents. There is no doubt that something like this is happening in the euro area. Panetta shows that before the pandemic, corporate profit margins averaged around 7.2% of turnover, but with the post-Covid recovery they have risen one step: in the last few months they have stabilized between 8.5% and 8.7%. Generalized inflation has given the right, above all to large groups with unique products, to transfer higher price increases to customers than they themselves suffered to buy the raw materials they needed (from steel to electricity). For example, Porsche, in the midst of the gas crisis linked to the war in Ukraine, increased the margin of return on each car sold from 16.9% a year earlier to 19.4% in mid-2022.

In theory, this shouldn’t have happened in Italy, because many companies earn less and consumers are more easily frightened because they are more fragile. But look at the graph above. It represents the cost of products when they leave the factory gates, according to the Istat database. It shows that sectors such as the entire food industry (blue line), textile-clothing, chemistry, the production of plastic materials or building materials such as tiles, glass or above all cement (green line), or even the metallurgy or the manufacture of machinery, have reacted to the explosion in the cost of raw materials. They started to increase their prices with the trigger of the natural gas increases in early 2021, when they still had prices practically the same as in 2015. Since then, however, they have not stopped. For example, ceramic products were up a further 4% in February compared to January. Also the production and processing of meat or the production and processing of fruit and vegetables or the manufacture of underwear recorded ever higher prices in February even after a year and a half of continuous increases. Other product categories stabilized for the first time in February, but after rising by at least 25% in the last two years.

Cost increases and raw materials

In essence, we are still in full inflation. Rises are slowing down, but the new higher price levels have at least firmed up. The Italians know that, by the tens of millions, they are struggling to make it to the end of the month. All the increases were motivated by the imperative of companies to adapt to the higher costs of raw materials, which rose very rapidly until last summer. But the graph above shows, with the example of natural gas in Europe (TTF) that the trends have now reversed. Gas costs industrial companies 57% less than a year ago, Brent oil 22% less, electricity 40% less, copper 14% less, steel 23% less and iron ore 20% less. Energy transition minerals have also dropped in price, with lithium and cobalt price lists halved or more. Almost all heavy industry inputs have become cheaper over the past year. Same story on the basic products of the food chain: urea (fertilizer) already up 67% on a year ago, wheat up 39%, soybeans up 11.5%.

Increases no longer reflect commodity prices

We understand each other: many lists of industrial products have been adjusted upwards to reflect the prices of raw materials that no longer exist, because the latter have deflated. They’ve been down for at least six months, if not more. Yet the prices at the factory gates and those on the supermarket shelves have not dropped, indeed in many cases they have not even stopped and continue to grow. It is not surprising if corporate profits, in some cases, increase. It is no coincidence that in its latest report on competitiveness, Istat writes (on pages 83) that, in the energy, wood, paper and printing industries, chemistry, machinery and construction, the increases in Italy have been more than proportional to the cost increase. I guess it takes some time for this gap to close. It doesn’t happen overnight. Nor do I believe that Landini’s proposal – an extraordinary tax on profits and supervision by the Ministry of Enterprise – is the right recipe. But don’t even pretend that nothing is happening.

This article was published in the Corriere della Sera newsletter Whatever it takes, to subscribe click here.

Subscribe to the newsletter of The Economy

Whatever it Takes by Federico Fubini

The challenges for the economy and markets in an unstable world

Europe Matters by Francesca Basso and Viviana Mazza

Europe, the United States and Italy that count, with innovations and important decisions, but also small important stories

One More Thing by Massimo Sideri

From the world of science and technological innovation, the news that changes our lives (more than we think)

And don’t forget the newsletters
The Economy Opinions and the Economy 6 pm