The profitability of UK private non-financial companies remained stable in the final quarter of last year, according to official data released on Tuesday that supports interest rate-setters’ findings that higher corporate profit margins are not pushing up inflation.
Figures from the Office for National Statistics showed that companies made a net rate of return of 9.8 per cent in the three months to December 2022, unchanged from the third quarter and below the prevailing rate before the onset of the coronavirus pandemic.
The data will underpin the Bank of England’s view that “greedflation”, where businesses drive up inflation by increasing prices beyond the extent that their own price pressures would demand, is not responsible for driving up the rate of inflation, which stood at 8.7 per cent in April.
Although the government has suggested introducing price caps on food, now the biggest driver of inflation, BoE governor Andrew Bailey last week said there was no evidence of profiteering among food suppliers or retailers, or other non-energy and non-financial groups.
He told MPs that food prices had risen partly because of steeper raw material costs and energy prices, and partly because food producers had agreed to buy commodities at the high prices reached last summer.
Bailey said that although corporate profits had increased, the trend was not the result of profiteering but “a story about rebuilding margins that were squeezed, particularly in the early part of last year”.
Jonathan Haskel, who also sits on the BoE’s Monetary Policy Committee, said in a speech last Thursday that “the contribution of rising business profits to recent inflation is small”.
Tuesday’s figures will reinforce the consensus among members of the MPC, with the 9.8 per cent profit rate in non-financial companies lower than every pre-pandemic year stretching back to 1997 except 2009.
Excluding companies operating in the North Sea, the net rate of return on capital recovered in the fourth quarter as wholesale oil and gas prices fell, offsetting a drop in the profitability of energy companies.
However, the level of profitability for companies on the mainland of the UK was still lower than before the onset of Covid-19.
The average net profitability of companies operating in the North Sea declined from 23.9 per cent in the third quarter to 12.7 per cent in the fourth quarter, according to the ONS.
Most economists expect supermarkets to pass on price cuts in raw materials as they feed through from commodity prices to retail prices over the coming year, helping to bring down headline rates of inflation.
Julian Jessop, a fellow at the Institute of Economic Affairs, a free market think-tank, said strong competition among retailers with “tiny profit margins” made price caps “pointless” as a way of lowering inflation.
Source: Economy - ft.com
