The theory that uncomfortably high inflation is partly or perhaps mostly caused by price gouging by opportunistic companies — is understandably a pretty hot topic. It even has a cracking portmanteau: “greedflation”.
Isabella Weber and Evan Wasner of the University of Massachusetts examined the US data earlier this year in an already-influential paper titled Sellers’ Inflation, Profits and Conflict: Why can Large Firms Hike Prices in an Emergency? They concluded that the post-Covid US inflation surge was “predominantly a sellers’ inflation that derives from . . . the ability of firms with market power to hike prices”. Cue outcry.
For obvious reasons, this is also becoming a hotter topic on the other side of the Atlantic, so Goldman Sachs’ economists have dug into the eurozone corporate profit and inflation data. Here’s what they found, with our emphasis below:
— The outlook for profit margins has gained policymakers’ attention as a key factor in determining when and how quickly Euro area core inflation will cool from the current high levels. Unit profit growth now accounts for more than half of GDP deflator growth, with compensation per employee growth explaining a little over a third. While unit profit growth has been strong across sectors, contact intensive services following the pandemic re-opening and energy have been the biggest contributors to aggregate unit profit growth.
— Following the sharp decline in gas prices, however, unit profits in the energy industry should decline, too. Surveys also suggest that margin growth is peaking, with room for some margin compression in particular in manufactured goods. Historically, higher wage growth has also led to slower margin growth, as some of the increased labour cost is absorbed into firms’ profit.
— We estimate the effect of these factors using a simple statistical model. This suggests that unit margin growth should cool quite rapidly this year, as lower growth makes it harder for firms to raise their prices, while strong wage growth eats into unit margins. The deceleration of activity growth over the last year and our expectation for subdued Euro area growth this year is also likely to weigh on margin growth.
— The outlook for inflation therefore is driven by a combination of two factors: higher wage growth is likely to push up inflation but a more subdued margin outlook is likely to weigh on it. On net, we forecast that stronger wage growth is likely to continue to push up on inflation, but that this will be offset by lower margin growth across goods — where margins are already plateauing — and lower services margin growth due to their sensitivity to wage growth. We therefore look for sequential core inflation to slow from 0.4%mom in March to 0.2%mom in December, implying a year-on-year rate of 3.9%yoy by year-end.
You can read the full report here.
Source: Economy - ft.com
