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Profits are driving inflation. When will politicians and the BoE admit it?
- andsoitis 3y agoThe actual article is here: https://www.taxresearch.org.uk/Blog/2023/06/26/profits-are-driving-inflation-when-will-politicians-and-the-bank-of-england-admit-it/ https://www.taxresearch.org.uk/Blog/2023/06/26/profits-are-d... What's weird is that the author uses EU data, not UK data, but the headline refers to the Bank of England.
- n4r9 3y agoThe author is UK-based, but perhaps the corresponding data for the UK has not been published?
- xctr94 3y ago“I stress, this is the euro area. It does not change my suggestion on the role of interest rates, which are a peculiarly UK phenomenon.”
- andsoitis 3y agoRight, and the very next sentence (after the infographic) is: "Wages have driven only a small part of inflation in Europe. I also suspect that is true here too." So the body of the article only talks about EU data but then he "suspects" it applies similarly to the UK by putting it in the headline, without drawing any actual connection with data.
- heffer 3y agoAnd the IMF blog post that is the source of that article is here: https://www.imf.org/en/Blogs/Articles/2023/06/26/europes-inflation-outlook-depends-on-how-corporate-profits-absorb-wage-gains https://www.imf.org/en/Blogs/Articles/2023/06/26/europes-inf... I recommend reading that instead, as the original submission provides no additional value over what is written in the primary source.
- acaloiar 3y agoBetter yet, the paper on which the blog post is based: https://www.imf.org/en/Publications/WP/Issues/2023/06/23/Euro-Area-Inflation-after-the-Pandemic-and-Energy-Shock-Import-Prices-Profits-and-Wages-534837 https://www.imf.org/en/Publications/WP/Issues/2023/06/23/Eur...
- soco 3y agoAnd the HN discussion of same: https://news.ycombinator.com/item?id=36483276 https://news.ycombinator.com/item?id=36483276
- DoingIsLearning 3y agoAgree. Mods / dang perhaps there is value in changing the submission to link to the original content?
- FollowingTheDao 3y agoYeah, that would be great. I have no idea why it chopped off the whole URL. I am 100% sure I pasted the whole link in there.
- chaos_emergent 3y agoIANAEconomist: how would one go about measuring the portion of inflation due to profits? I'd guess that it's some sensitivity model?
- nostrademons 3y agoNominal GDP, real GDP, personal income, and government tax receipts are all macroeconomically tracked stats. Subtract out taxes and personal income from nominal GDP and you have profits.
- guerrilla 3y agoNow point me to a website that does this for me so that I don't need to write programs or make spreadsheets :)
- s1artibartfast 3y agoYou just calculated prof azov its. Not inflation caused by profits? Answering where the money went doesn't explain where it came from
- nostrademons 3y agoThere's an identity where nominal GDP = real GDP * GDP deflator%, where the GDP deflator is a measure of inflation that also includes exports. The calculation I described is basically just computing the components of GDP through the income approach, GDP = wages + rent + interest + net imports + taxes + profits. Then you do this for both nominal and real GDP. The ratio between them is inflation within each factor of production. A weighted sum of these individual inflation rates should give back the overall GDP deflator; comparing the contribution of an individual factor of production's term vs. the overall inflation number gives the percentage of inflation due to a particular factor of production.
- jmyeet 3y agoIt's reached the point where even the IMF (which is really a policy arm of the US State Department) has to admit it [1]. To many (myself included) this has been entirely obvious for a year or more. The interesting part is how many apologists come out of the woodwork to defend capitalism when they are not part of this and they're just as much a victim as anyone else. I think the biggest problem is that people confuse markets with capitalism. Markets are commerce. They happen in every economic system. It is not a unique trait to capitalism. Capitalism describes how value is created (labor) and how the surplus value of labor is concentrated into the hands of the very few (the capital-owning class) where once that wealth was concentrated into the hands of an artistocratic class that derived from the divine right of kings (ie feudalism). That's literally all it is. We desperately need to increase corporate taxation. [1]: https://www.imf.org/en/Blogs/Articles/2023/06/26/europes-inflation-outlook-depends-on-how-corporate-profits-absorb-wage-gains https://www.imf.org/en/Blogs/Articles/2023/06/26/europes-inf...
- westmeal 3y agoIt's too bad there's a shit load of money behind not raising the corporate income tax.
- tdehnel 3y agoIf we increase corporate taxes, companies will respond by either raising prices, struggling to innovate/grow, or going out of business. Which of those outcomes do you prefer and why?
- jmyeet 3y agoThis is capitalist propaganda. Corporations will continue to exist as long as there's a profit to be made. If they have to pay 10% of those profits in taxes or 80% they're still making money and there's still a profit incentive. The idea that a tax on profits will drive a company out of business belies a fundamental misunderstanding at best or deliberate deception at worst.
- tdehnel 3y ago
- thworp 3y agoWhat data are they basing their graph on? I've looked at quite a few quarterly reports by large corporations and I see the same pattern everywhere: Nominal sales up by ~10%, cost of goods sold up by ~20%, profit up by low single digit percent. In other words they are driving towards a cliff and the last 2 quarters of this year we will probably see losses. But yes, it has to be those damn greedy corporations, it couldn't possibly have anything to do with shutting down global supply chains while increasing and radically shifting consumer demand.
- FollowingTheDao 3y agoDude, this is the IMF admitting it is true!
- piva00 3y agoYeah, just read it directly from the ghouls at IMF: https://www.imf.org/en/Blogs/Articles/2023/06/26/europes-inflation-outlook-depends-on-how-corporate-profits-absorb-wage-gains https://www.imf.org/en/Blogs/Articles/2023/06/26/europes-inf...
- deelowe 3y agoSeeing the same thing from the inside. Both mega corps I've worked for over the past 5 years have this issue.
- acaloiar 3y ago> From a more general perspective, our paper is loosely linked to the strand of literature which analyzes profitability and market power using firm-level data (e.g., De Loecker et al (2020), Davis et al (2022)) but we focus on national account data. [1] [1] https://www.imf.org/-/media/Files/Publications/WP/2023/English/wpiea2023131-print-pdf.ashx https://www.imf.org/-/media/Files/Publications/WP/2023/Engli...
- thworp 3y agoThanks for the deep link, the other one sent me on an infinite redirect loop. It is still puzzling to me, since they have "Trade, Travel, Accom. and Food" with the highest profit contribution in figure 2. However if you look at the quarterlies of Nestel, P&G and others their profits are increasing by low single-digit % if at all.
- BlandDuck 3y agoA couple of caveats: (1) The supply chain and risk landscapes have changed, and my anecdotal sense is that companies need larger margins to compensate. (2) Competition will generally keep abnormal profits in check. If your competitors raise prices and underpay workers, there is nothing stopping you from keeping your own prices lower and increase the wages you pay to attract the people you need and increase your own sales and profits. If companies don't do that, you need to at least contemplate why not.
- frithsun 3y agoCompanies being greedy and attempting to maximize their profits is a totally new thing. Up until recently, companies were all about being great to employees and saving their customers money.
- guerrilla 3y ago> Companies being greedy and attempting to maximize their profits is a totally new thing. Up until recently, companies were all about being great to employees and saving their customers money. This is sarcasm, right?
- TheCapn 3y agoDepends on what timeframe you consider the OP sees as "new thing". Reaganomics really was the start of this trend though I'm sure it is easy to find examples prior to then looking back until the Great Depression.
- thatguy0900 3y agoCompetition only works if the government keeps a few megabrands from buying up everything, which is not really the case
- tdehnel 3y agoIt is easier than ever to start a company, even one that makes physical goods, and compete in almost every sector.
- _uhtu 3y agoMy favorite part of this whole thing is how many people are absolutely falling over themselves to say "there's no way companies took advantage of decades of consolidation and the political narrative of free money leading to inflation to raise prices for more profit", meanwhile the companies themselves are bragging about raising prices just because they can. In their own earnings reports.
- jfghi 3y agoI thought mergers increased efficiency to better serve the customer. /s
- FollowingTheDao 3y agoThey do! And they care about your "social issues" as well! /s
- throwaway173738 3y agoThat’s why we’ve worked so hard to eliminate waste! We’re always buying carbon offsets for a greener tomorrow!
- devonkim 3y agoThe customer is the shareholders, silly Wait a second, tech stocks are down like crazy for most of us. Fat good that did for us all as employees. Clearly raising interest rates isn't the kind of silver bullet that economists hoped it'd be.
- gfdsgfsdgfs 3y agoWhich mergers are you talking about that caused inflation more than comparable goods in other countries?
- AndrewKemendo 3y agoIn my experience the vast majority of people have very few root values that they won’t betray for a little more pleasure or power. People very quickly adopt a “if you can’t beat them join them” attitude when facing resistance or throw their hands up and say “I’m just trying to live” or “that’s not my problem” when encountering a moral dilemma. So no wonder that when faced with a moral dilemma most people put themselves in the position to say “I can see myself doing that and wouldn’t want to feel judged for it, so I’ll defend the practice because maybe I’ll need to do that later.” I’m trying to figure out how to build the structure of society to promote the opposite of that - to make it trivially easy to say no to unethical behavior instead of just going along with the crowd. I’m coming up short with how to do that.
- alphanullmeric 3y ago[flagged]
- deleted 3y ago[deleted]
- leg100 3y ago“I stress, this is the euro area. It does not change my suggestion on the role of interest rates, which are a peculiarly UK phenomenon.” A strange remark. I understand that the ECB interest rate is a little behind the curve but I don't see how that renders "interest rates...a peculiarly UK phenomenon". They're rising everywhere, and are higher than they have been since the financial crisis, and the BoE's 5% is less than the USA and many other countries.
- breakingrules 3y ago[dead]
- eitau_1 3y agoStating that margins/profits are causing inflation is like stating that water vapor is causing global warming.
- brodouevencode 3y agoCar engines cause auto accidents.
- eitau_1 3y ago? I mean both (profits/water vapor) are indeed powerful but only mere amplifiers of underlying causes in both phenomena. BTW it's a shame MMT-ers rebranded themselves into greedflation folk and stopped promoting their painful but effective solution to inflation: raising taxes.
- obastani 3y agoI don’t really understand the argument that corporate profits are driving inflation. If demand for a product goes up, we would naturally expect prices to rise since there is more competition for a fixed set of goods. Since the cost of producing the product has not increased, corporate profits necessarily rise. In the long term, we would expect competition to drive prices back to marginal cost as production of that product increases, but this process can takes time. In this case, how do you separate inflation due to increased demand from inflation due to corporate profits? The two seem inextricably tied to me.
- FollowingTheDao 3y agoBecause the corporations are saying it is an increase in costs that are driving higher prices, not demand. And the price curve for things like "eggs" is not being driven by demand.
- Matticus_Rex 3y agoDemand relative to supply. You don't think prices for eggs are being driven by supply and demand?
- FollowingTheDao 3y agoI think the profit is not being realized because of supply and demand.
- Matticus_Rex 3y agoWait, the profit "is not being realized?" That contradicts all of what you're saying elsewhere, no?
- pookha 3y agoI have a hard time believing this is supply-side inflation. Are they saying that multi-national corporations are inflating their own prices so-as to invoke cost-push inflation so that they can profit on the back-end? If that's what the EU is saying (which is what you're implying) than they're insane conspiracy theorists. markets aren't centrally planned processes, especially markets as complex as the EU's. Chances are it's demand side inflation, which is exactly what the US has. The US had a massive recession in 2007 and they inundated corporations with bailouts yet this did nothing to spike inflation. When the US pumped trillions of active currency into the economy they triggered demand-side inflation (https://www.bloomberg.com/news/articles/2022-08-24/demand-surge-was-top-us-inflation-driver-n-y-fed-study-finds https://www.bloomberg.com/news/articles/2022-08-24/demand-su...). How is the EU any different? They too pumped excessive amounts of currency into their markets (https://www.consilium.europa.eu/en/policies/coronavirus/covid-19-economy/ https://www.consilium.europa.eu/en/policies/coronavirus/covi...).
- monero-xmr 3y agoOn the one hand, the amount of money printing, pandemic stimulus, debt forgiveness, payment pauses, eviction moratoriums, increased the amount of money out there. On the other hand, companies suddenly became far more greedy. Look at all my charts! Which seems more likely the cause of inflation?
- anononaut 3y agoIt's always the banks. Always has been, always will be.
- FollowingTheDao 3y ago1) The IMF is admitting this is true. 2) The money printing is the cover for them raising prices. "We can't help it, look at all the money flying around!" 3) They did not have to raise prices to maintain a certain profit. 4) People paid down debt with the stimulus - https://fred.stlouisfed.org/series/CDSP https://fred.stlouisfed.org/series/CDSP 5) Debt forgiveness? What debt forgiveness? 6) payment pauses, eviction moratoriums - now that they are over, why aren't prices coming down? 5)
- addisonl 3y agoYou taking about the meager stimulus checks that was literally years ago now?
- LatteLazy 3y agoEveryone (all people, corporations, government, ngos, etc) are driving it. The question is not and has never been what is driving/causing inflation. The question, previously and now, is who will suffer to reduce it? The answer is working people. Because they are the ones least able to protect themselves. We could stop it by inflicting pain on non-working people or billionaires or corporations or a few other groups. But working people have the least political clout, the least sympathy, the least political clout and the least ability to just opt out (go abroad etc).
- Nasrudith 3y agoDumb question: wouldn't increased corporate profits be an anti-inflationary measure longer-term due to decreased monetary velocity resulting in less effective money in the economy? Lower strata spend a higher percentage of their money than higher ones, thus making money higher velocity.
- FollowingTheDao 3y agoNot if people are going into debt buying things they need and then cannot pay off those debts. (This is screaming a future recession to me BTW) Large Bank Consumer Credit Card Balances: Total Balances https://fred.stlouisfed.org/series/RCCCBBALTOT https://fred.stlouisfed.org/series/RCCCBBALTOT Delinquency Rate on Credit Card Loans, All Commercial Banks https://fred.stlouisfed.org/series/DRCCLACBS https://fred.stlouisfed.org/series/DRCCLACBS
- BasedAnon 3y agoBut they're not, banks are.
- W3cUYxYwmXb5c 3y agoThis is propaganda, trying to explain current conditions in a way to fit their preferred narrative. This is like claiming that if you sneeze that causes you to get a cold.
- objektif 3y agoPaul Graham was belittling people on Twitter for suggesting that corporations are partly responsible for the inflation problem. I respect him a lot but I was shocked to see that he is unable to this point.
- treeman79 3y agoThis is total nonsense. Read Basic Economics by Thomas Sowell. In a free market companies that are making large profits quickly find themselves with competitors. People that do a better job cheaper are the winners. Eventually a balance happens when several companies are making minimal profit. Breakdowns occur when government interfere and let certain companies get an unfair advantage. Usually high regulation requirements that only certain companies can met. Inflation is happening because the government is printing money like crazy. Same reason it happens all counties where money isn’t worth paper it’s printed on.
- srean 3y agoIn a free market ... there lies the rub.
- sowbug 3y agoYour argument is more soapboxing than an effective refutation of the complaint. You agree inflation is happening. You agree that large-profit companies are profiting largely. Thus, you agree with the factual basis of the complaint. Let us know when that Amazon competitor comes along.
- treeman79 3y agoWrong. My argument is that government is screwing everything up. Between printing money, which is what is actually causing inflation. Also that if any obscene profits are happening, it’s because the government is choosing winners, and losers. Like massive contracts for big Pharmacy, while banning , criticizing or bad mouthing, any alternatives to expensive drugs. Or shutting down all of the all mom and Pop stores during the pandemic, and only allowing big box realtors open up. Or having such high regulations In markets that no new competitors can enter. If you want less inflation, the government needs to spend less.
- npteljes 3y agoSo that begs the question. If the conclusion doesn't add up, the assumption can be wrong. So, maybe it's not a free market.
- Proven 3y ago[dead]
- csomar 3y agoPlot twist: Corporations raised prices because there was extra liquidity that they can capture. If the money printing didn't happen, these raises couldn't happen too (because there will be no supply of money to satisfy them). I'm actually thinking it's not a twisted plot. Companies went ahead of the curve. Instead of waiting for the inflation-induced by printing, and gradually raising prices, they went avant-garde and raised prices accordingly. You are (were) an idiot if you didn't raise prices.
- brodouevencode 3y agoThis is a bogeyman article. Inflation is too many dollars chasing too few goods. If the ECB/US Federal Reserve/Bank of Japan would turn their printers off the inflation cycle would naturally work itself out. MMT is a joke.
- OGWhales 3y ago> MMT is a joke. I have my own issues with MMT, but I feel like most people that share your position seem to believe that MMT means “you can print as much money as possible without ramifications” which is not correct. One of the core ideas of MMT is that inflation is the limiting factor of how much money can be printed, or rather that inflation should be the gauge of when to stop. The idea is to spend new money wisely, in ways that increase productivity rather than contribute to inflation. I think that part of MMT is quite reasonable.
- brodouevencode 3y agoEvery economic theory will be employed in the worst ways possible, so in practice the `printer go brrrrr` is what happens. Anecdotally - one of the primary reasons of why I left academia (economics specifically) is that the theory never matched the practice. I should have stayed in engineering.
- konschubert 3y agoYes, they do. It's called supply and demand. Those profits should drive competition. If they don't maybe let's have a look at what is preventing new competitors from entering the market?
- glimshe 3y agoIf companies can just increase prices at will and drive inflation this way, why weren't doing that before overwhelmingly? Why stop at any price? Why don't eggs cost 100 pounds for a dozen, they would have amazing profits if they charged this much. Maybe the unprecedented, recent regime of low interest and money printing have something to do with this? Hmmmmm... BTW, the government LOVES the narrative that evil corporations are creating problems and the government itself is innocent of any wrongdoing. So we will keep hearing this (not the first time on HN).
- kelseyfrog 3y agoCompanies have a coordination problem when applying this strategy. There was a week in early '22 when the major media outlets all shifted from "the economy is struggling" one day to "inflation is a major concern" the next. This provided the necessary synchronization point and public acceptance that rising prices had a cause. But synchronization alone can't account for everything. The pricing variability that the public has grown accustomed to, starting with the pandemic, has opened people's minds to be less reliant on price stickiness. TP is up this month, bread the next, eggs the next, is great cover and pretext to everything is now pricier.
- juancn 3y agoYou mean inflation adjusted profits? Profit margins adjusted for inflation will likely be about the same. The issue with inflation is one of expectation (trust me, I'm an experienced Argentinian) and usually government triggered a long time before any of its effects are noticed. There is some lag on the cause-effect chain and most people are rational about making their pricing decisions. Price fixing doesn't work and hasn't worked in ~1700 years so far (see https://en.wikipedia.org/wiki/Edict_on_Maximum_Prices https://en.wikipedia.org/wiki/Edict_on_Maximum_Prices ), I'm preemptive about this, because it's the next logical suggestion. It doesn't work. Back to inflation. It usually starts with a monetary phenomenon (e.g. stimulus checks, increased public spending, etc. or extra savings due to lockdown), that causes demand driven inflation once that extra money starts to circulate (there's supply driven inflation too, like the GPU card shortages, but that is easier to revert). Essentially there is more money available than the economy really needs. So the money to goods+services balance is wrong, so money is worth less. Remember, inflation is about the value of money, not the value of goods. Goods' "worth" are relatively stable (with some notable exceptions such as commodities). This devaluation of money causes protective behaviors on a production chain, you start pricing your stuff based on the expected value of money (you typically think about the replacement cost of your raw materials and labor, etc. rather than money itself). Since you're playing with the future, it's uncertain, so you play it safe, and add some extra margin to the prices just in case inflation gets worse. See where this goes? This composes and tends to accelerate inflation. On pathological cases it ends up in an inflationary spiral that ends in full economic collapse (see https://es.wikipedia.org/wiki/Hiperinflaci%C3%B3n_argentina_de_1989_y_1990 https://es.wikipedia.org/wiki/Hiperinflaci%C3%B3n_argentina_... - Spanish only - ) Usually the best way to stop it is to just cause a recession by drying up all that extra money. Once crap stops selling and the margins start to dry up, competition (on a healthy market) will drive prices down, but, again it will be slow. The inflationary loop has lag, it takes a while to accelerate and it also takes a while to slow down. It's scary to lower your prices when you expect high inflation, so once you turn the spiral on, slowing it down is painful for everyone, much more so for those of limited means. I like the phrase: "Inflation is a tax on the poor" and is mostly monetary. The rich know how to protect themselves from it.
- BLanen 3y ago
- lazzlazzlazz 3y agoGreedflation may be the most ridiculous theory I've heard in some time. A great laugh.
- friend_and_foe 3y agoThe statement in the title is usually a clear indicator that someone (willfully or otherwise) doesn't understand inflation. Nominal profits are higher when inflation is higher. You have to take into account inflation when measuring profits. Sure, some companies have an increased profit margin when adjusted for inflation, others don't. And there's the cantillion effect, those upstream on the debasement pipeline do profit from inflation. About the only exception to this is that when prices do go up, if production costs come back down companies very rarely bring prices back down, they acknowledge that people see a new normal and then pocket the difference.
- RickJWagner 3y agoI'd tend to think the massive government stimulus during Covid has something to do with it. But as for corporate profits-- no troubles. We all have the opportunity to be corporate owners. As profits rise, stock returns rise. It's a vital part of a diversified portfolio.