What are the main reasons of inflation? And who are the winners of rising prices? Picture Alliance
What drives the prices? What or who is to blame for inflation? This question worries many people. ECB President Christine Lagarde accused companies of excessively raising prices.
Does greed drive inflation? High wage agreements keep a “wage-price spiral” going. Or will price shocks continue to have an effect as a result of Corona and Russia’s Ukraine war?
For the first time, the Ifo Institute has calculated in detail which factors in which sectors have contributed how much to the price increase. There are many reasons for this, but there are certainly winners from inflation.
What are the causes of inflation? What drives the prices – or who? Is there a “greed inflation” as firms boost profits, as ECB President Christine Lagarde criticized? Do trade unions with high wage agreements keep a wage-price spiral going? Or the delivery bottlenecks caused by the corona pandemic and the energy price shock caused by Russia’s war are having an after-effect. The Ifo Institute has now analyzed for the first time which factors drove prices last year – and who has been among the winners of inflation so far.
The researchers examined – somewhat simplified – three factors: firstly, companies’ expenditure on intermediate services, secondly, wages and salaries, and thirdly, profits. Their result: “The most important price drivers in almost all economic sectors last year were sharply increased unit costs for intermediate goods”. These higher costs for raw materials, supplier parts and energy explain “about two thirds of the increase in consumer prices”.
The second most important price drivers were additional profit margins for companies. However, this does not automatically mean higher profits, write the Ifo researchers. Companies had to finance significantly higher depreciation from the surpluses because the replacement costs for machines, systems and buildings also rose sharply. In contrast, higher wages and salaries had little impact on inflation in 2022.
The following table shows the contributions to inflation. Overall, consumer prices in Germany rose by 6.9 percent in 2022. But only about three-quarters of consumer spending is on domestically produced goods. The remaining quarter are imports. For their analysis, the economists specifically looked at the consumer prices of goods produced in Germany. At plus 8.3 percent, they rose even more.
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This increase of 8.3 percent was made up as follows: 5.8 percentage points were attributable to more expensive advance services and 0.8 percentage points to wages for employees. Higher levies (balance of taxes and state aid) accounted for 0.5 points. Higher gross operating surpluses contributed 1.3 percentage points to inflation. However, if one also takes into account the higher depreciation, the influence of the operating surplus on prices was actually negative at minus 0.5 percent net.
“What we see is not an extraordinary picture,” said Ifo economist Timo Wollmershäuser. Basically, the burden of inflation would have been fairly evenly shared between consumers, businesses and employees. At least for the entire economy. However, this does not apply to all sectors.
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Winners of inflation: farmers, construction companies, trade
Because there are big differences. In agriculture, the price increase for products in 2022 was the strongest at plus 34.7 percent. However, only 14 percent of this was due to higher prices for upstream services. Higher wages and salaries were of little consequence at plus 1.1 percent. In contrast, higher surpluses in agriculture and forestry operations contributed 11.2 percentage points to inflation. Even after depreciation, the farmers’ net surpluses, at eight percentage points, weigh more heavily than in any other industry.
In the construction industry, too, a large part of the price increase of 16 percent is due to higher company surpluses. They alone contributed 6.1 percentage points net to higher construction prices. In trade, transport and hospitality, two percentage points of the higher prices were still due to higher corporate net surpluses.
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Industry paints a different picture. Here, too, prices rose sharply by 13.9 percent. However, the lion’s share of 12.4 percentage points was accounted for by advance payments. Because wages and salaries, taxes and depreciation were also slightly more expensive, the smaller surpluses of the often energy-intensive industrial companies reduced inflation in this sector by 0.4 percentage points.
Companies in sectors in which prices did not rise that much, for example in the information and communication sector, suffered the most significant losses, with a price increase of only two percent. But because wages and salaries had already risen significantly here in 2022, the surpluses fell. The situation is similar in many other service sectors.
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