Shaking your head in the supermarket is now part of everyday life. The prices that are sometimes called there leave many speechless. And some people are wondering whether this is really all due to general inflation, or whether some are taking advantage of the situation to line their pockets.
The Ifo Institute has now examined exactly this and has come to the clear conclusion: yes, a significant proportion of inflation is due to an expansion in corporate profits. Wages, on the other hand, have hardly contributed to this so far.
However, economists also have explanations for these developments that do not necessarily indicate excessive greed among companies. In addition, the trend may soon be reversed.
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“Some companies were able to expand their profit margins last year due to strong demand in many consumer-related areas,” says Timo Wollmershäuser, head of Ifo economic forecasts.
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He has analyzed what were the drivers for price developments in domestically manufactured goods and services in 2022. This accounts for around three quarters of consumer spending, the rest of the spending was not taken into account.
The overall inflation rate in Germany was 6.9 percent last year, and food and energy prices even rose by more than 20 percent each. For goods and services produced domestically, which are included in the Ifo analysis, the average inflation rate was 8.3 percent.
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According to Wollmershäuser’s calculations, 1.4 percentage points alone were due to an increase in the companies’ gross profit mark-ups, i.e. to an increase in their profits. 5.7 percentage points can be attributed to the increase in the price of preliminary products, energy and a large number of raw materials, 0.7 percentage points to various other factors, such as the phasing out of corona aid.
Wages, on the other hand, contributed only 0.6 percentage points to the headline inflation rate. “So far there has been no wage-price spiral,” says Wollmershäuser.
The breakdown by individual economic sectors is particularly interesting. Because the surcharge that the companies granted themselves is particularly striking in agriculture. Here, overall inflation was 34.2 percent in 2022, but 10.1 percentage points alone were due to higher profits and only 1.3 percentage points to wages.
Source: Infographic WORLD
In construction, 6.5 percentage points of the inflation rate of 16.2 percent can be attributed to profit increases, only 1.8 percentage points to wages, and in trade, transport and hospitality wages accounted for just 0.1 percentage point of the total increase of 11, 3 percent off, but gains 2.6 percentage points.
However, there were also some industries where profits actually fell, which actually had a deflationary effect. This was particularly the case with public services, corporate or other service providers, but also in the area of communication and information. Here, however, wage increases ensured that prices usually rose anyway.
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Ultimately, the Ifo study confirms something that many economists have long suspected. Even Isabel Schnabel, a member of the Executive Board of the European Central Bank (ECB), said very firmly at an event four weeks ago: “Inflation was partly driven by corporate profits. Point.” And Bundesbank President Joachim Nagel said: “Some companies have taken advantage of the situation.”
Source: Infographic WORLD
The Ifo figures now support this with concrete data. However, the question is whether pure greed is behind the development – some have already spoken of a “greed inflation” in recent months. Or if there are other reasons.
“The strong increase in gross operating surpluses may overstate the actual profit situation of companies,” says Wollmershäuser. “After all, the remuneration of the capital factor measured in this way does not take into account that the capital stock depreciates over time and that replacement investments would have to be made to maintain the capital stock, which in turn cause costs.”
Source: Infographic WORLD
Ulrich Kater, chief economist at Deka, also objects that at the beginning of the inflationary phase, companies could not know whether and when, for example, commodity prices would fall again. “Companies had to use different prices in their calculations out of commercial prudence,” he says. The shortages would then have resolved faster than expected, and that would have driven profits. However, that is not greed.
There is also much to suggest that the price increases have now subsided – although prices remain high, they usually do not rise any further. On the other hand, wages are now catching up. According to the Federal Statistical Office, they increased by 5.6 percent in the first quarter compared to the corresponding period of the previous year.
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After deducting inflation, workers still have a real wage loss of 2.3 percent. But compared to the second half of 2022, it has already halved. In addition, various wage settlements did not come into effect until the second quarter, and more will be added as the year progresses, all of which will bring significant premiums to employees.
Real wages are therefore likely to rise again soon. Then, however, the wage factor could – unlike in 2022 – become the decisive inflation driver.
Wage factor could become the next inflation driver
Unless the companies use the recently significantly expanded profit margins to at least partially compensate for this. They could accept lower profit margins in order to prevent a wage-price spiral – after all, this would only mean that the margins would fall back to the level before the start of the inflationary phase.
The big question in the coming months will therefore be whether companies will use their margins to cushion the inflationary pressure emanating from rising wages. ECB Director Isabel Schnabel is at least optimistic: “Our projections say: Yes, they will intercept them.”
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