‘Greedflation’ revisited

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Now that inflation is slowing sharply — even in the UK! — the theory that it was at least partly driven by greedy companies price-gouging customers has faded a little.

But some Bank of England staffers have now dug into the UK and European numbers to find out if there is any truth to the “greedflation” narrative.

If you can get over Gabja Zemaityte and Danny Walker calling corporate accounts “a novel data source”, there are some interesting bits in the post on the BoE’s Bank Underground blog, based on their sample of over 1,000 large UK and European companies up to the end of 2022.

Such as (with Alphaville’s emphasis below):

Consistent with previous analysis of aggregate incomes, price indices and business surveys, we find no evidence of a rise in overall profits in the UK — prices have gone up alongside wages, salaries and other input costs. Companies in the euro area are in a similar position. However, companies in the oil, gas and mining sectors have bucked the trend, and there is lots of variation within sectors too — some companies have been much more profitable than others.

Here’s what that looks like charted (NB the size of the bubble is proportional to the industry’s economic contribution):

It should be noted that the energy industry’s profitability increase is not massively out of whack with historical norms (and has made little difference to the overall profitability picture in Europe at least).

However, as the University of Massachusetts’ Isabella Weber and others have noted, there is something special about energy inflation, given how energy is an input in virtually every other industry.

In a 2022 paper she and Jesús Lara Jauregui, Lucas Texeira and Luiza Nassif Pires showed that things like oil, gas, utilities, housing and agricultural prices were “systemically significant” for their ability push up the prices of everything else. And of these, energy prices were by far the most powerful.

So it’s possible that most companies are innocent of the “greedflation” charge, but somewhat higher profit margins of oil and gas companies (on top of the huge run-up caused by Russia invading Ukraine) rippled through the entire economy?