How company profits are keeping prices high
When the big oil companies announced record profits in February, even US President Joe Biden was shocked. The White House said it was “outrageous” that ExxonMobil made a profit of $56 billion (€51 billion) in 2022 as consumers struggle with rates of inflation not seen in decades.
Leading policymakers in Europe have also weighed in on the issue, imposing windfall taxes on energy companies. Although price pressures have recently eased from record levels, the eurozone is still recovering from high levels of inflation. Consumer prices in the common currency area rose 6.9% in March from a year earlier, keeping inflation at more than three times the European Central Bank’s 2% target.
What is causing inflation?
The reopening of the economy after the COVID-19 pandemic has resulted in pent-up demand, even as supply disruptions caused by lockdowns persist. High demand coupled with supply problems fueled inflation. Consumer prices rose further after the Russian invasion of Ukraine, which sent energy and food prices soaring.
While the impact of reopening has largely eased and supply bottlenecks have eased, inflation still remains stubbornly high.
Policymakers are concerned that increasing profit margins could have a big role to play.
Speaking at a conference in Frankfurt last week, Fabio Panetta, a member of the ECB’s executive board, presented a remarkable chart. He showed how corporate profits in the eurozone rose faster than wages.
“The opportunistic behavior of companies can also delay the fall in core inflation,” said Panetta. “We must monitor the risk that a price-earnings spiral could make core inflation more rigid,” she added, with an apparent play on words about the much-feared wage-price spiral.
According to a Reuters reportconsumer goods companies in Europe increased operating margins to an average of 10.7% in 2022, a quarter higher than 2019, before the pandemic.
“Companies in certain sectors have managed to take advantage of the state of emergency caused by the pandemic and the war to raise prices in ways that would be impossible in normal times. When prices go up more than costs, profit margins go up,” Isabella Weber of the University of Massachusetts Amherst told DW.
Ulrich Kater, chief economist at Deka Bank, says it was the fog of uncertainty during the pandemic and war that prompted companies to raise prices.
“You want to implement a safety margin so you don’t get bogged down by later cost increases,” he told DW.
Salary growth follows rising profits
In the United States, companies are registering the highest profits since the end of World War II. This is according to a recent study by Isabella Weber, who also masterminded the German ceiling on energy prices.
In Europe, “the effect of earnings on domestic price pressures was exceptional from a historical perspective,” ECB economists wrote in a blog in March.. Profit growth outpaced wage growth, especially in agriculture, manufacturing, trade, transport and food, mining and utilities, according to ECB calculations.
With an eye on recent earnings that are driving inflation, Weber said supply chain disruptions have altered the dynamics of competition. Typically, consumers may switch to other suppliers if a company raises prices to maximize profits, explains Weber, but “if all competitors know that the competition can’t serve its own customer base, a price increase doesn’t threaten loss of market share as would otherwise happen.”
Source: DW
Lori Barajas is an accomplished journalist, known for her insightful and thought-provoking writing on economy. She currently works as a writer at 247 news reel. With a passion for understanding the economy, Lori’s writing delves deep into the financial issues that matter most, providing readers with a unique perspective on current events.