Surprisingly, inflation in Europe now comes from corporate profits

Surprise: inflation in Europe no longer comes from energy, whose prices have almost returned to pre-pandemic levels, nor from wages as many feared when recalling the social tensions of the 1970s. Price increases – excluding external factors, such as the impact of imports – are increasingly driven by corporate profits in the Eurozone. And it is not some left-wing leader or an isolated economist who is saying this, but the European Central Bank itself, which certainly cannot be accused of Bolshevism. Italian ECB board member Fabio Panetta said in an interview that “we are probably paying too little attention to corporate profits”. There are sectors – he added – “in which the costs of raw materials are falling but prices for consumers are rising, as are profits”. Similar words were pronounced by Christine Lagarde herself, according to whom “profit margins continue to increase as someone is taking the opportunity to test consumer demand by exploiting the imbalance between supply and demand, raising prices beyond what is necessary by the costs”.

In fact, in the generalized rise in prices it can be difficult for the family in the supermarket to distinguish the products on the basis of the increases suffered in recent months. And above all if the prices of all available products increase, even of essential goods, it is difficult to do without them. It also happens that the price lists have increased in recent months due to the higher costs of raw materials and energy but then they no longer go down when conditions become more favourable, guaranteeing profit margins along the supply chain. In short, we can bet that we will probably never see the one-euro coffee we were used to until a year ago. It is again the European Central Bank that has identified the sectors in which this has happened: agriculture is in the lead, followed by customer services, manufacturing and then energy. A dynamic that Frankfurt economists describe as “historically exceptional”. If profits had contributed to a third of domestic inflation between 1999 and 2022, they have increased to two thirds in the last year, writes the ECB.

Even in Italy, company margins have contributed to raising prices. According to Bloomberg’s calculations, more than 60 percent of the increase in prices in our country was determined precisely by the search for earnings by companies. The wage increases, on the other hand, were minor, on which the attention of central bankers was concentrated. Istat itself has found that in recent months contract renewals have accelerated again and wages have increased by 2.2 percent compared to a year ago: an increase that is insufficient, however, to keep pace with prices. A phenomenon also present beyond the Atlantic Ocean, in the United States, where however wages have grown significantly thanks to a very flexible labor market and where the bargaining power of employees has been felt. According to the calculations of the Economic Policy Institute, profits have indeed tripled the weight on American domestic inflation, but without exceeding the contribution of wages.

According to some economists, profit inflation remains less of a concern than wage inflation. In fact, the increase in wages in response to the rise in prices can trigger a real spiral, increasing the costs of companies which in turn can offload the higher expenses on the price lists, further increasing inflation. Corporate profits, on the other hand, do not present this risk. Indeed, there are already those who argue that with such wide margins there is now room for workers to request wage increases without further pushing the pressure of inflation.

Certainly the rise in prices from profits is not easy to include. It is certainly not possible to intervene directly on the price lists in a market economy, while the increase in interest rates by central banks continues to affect demand.