With profits driving inflation, workers take double hit

WITH predictions that high levels of inflation could be with us for a while, the question being increasingly asked is: are profits driving inflation? And the evidence increasingly suggests that is the case.

It’s certainly not wages. The IMF studied the relationship between wages and prices over the last 50 years and found almost no evidence of a wage-price spiral. This is confirmed by Ireland’s recent experience. In 2022, inflation rose by 7.8%. Wages rose by 3.4%.

No wage price spiral there. If anything, wages had a disinflationary effect. But what about profits? The evidence is piling up. Studies in the US, the UK and Australia have all found that profits, not wages, are the main contributors to rising prices.

The Financial Times reported that after-tax profit margins in the US are the highest since 1945 RTÉ recently reported that the European Central Bank has acknowledged the role of profiteering on the back of inflation.

In its recent quarterly report, the Irish Central Bank published data showing that profit margins made up over 60 per cent of domestic business prices.

If profits are pushing inflation there’s another question to be asked: why is the European Central Bank determined to continue raising interest rates? The effect of rising interest rates is to suppress wage increases, drive up unemployment, and reduce consumer spending — all in the name of ‘taking the heat out of the economy.’

But if profits are the source of that ‘heat’, what’s the point of interest rate increases? As a chief economist for a global wealth management fund put it: ‘’It’s clear that profit expansion has played a larger role in the European inflation story in the last six months or so. The ECB has failed to justify what it’s doing in the context of a more profit-focused inflation story.”

It is important to note that rising profits are not uniform across the board. The ECB report suggested that it was larger, exporting firms that are the inflation-culprits as they have more pricing power in the market. For instance, fossil-fuel companies are driving up profits, dividends and CEO pay.

However, this may not be true of smaller companies. Many businesses in the ‘contact-sensitive’ sectors (retail, hospitality, transport, entertainment, etc.) may not be guilty (or as guilty) of price-gouging behaviour.

With profits driving wages, workers are taking a double-hit: first, owners are increasing profits rather than inflation-proofing wages, leaving real cuts in people’s living standards. And on top of that, workers are paying higher prices for the higher profits.

While the Government has no influence over the decisions of the ECB, it could still do the economy a favour by establishing as a matter of urgency a price monitoring agency, even on an ad-hoc basis.

The National Consumer Agency used to do some of this work (tracking prices) but has been less active since it was merged with the Competition Authority.

The Government could identify the sectors where profiteering is happening and which companies are engaged in this activity.

By exposing their actions, public pressure could be brought to bear and, in extreme cases, the Government could enact emergency orders (which they have the power to do) to suppress price increases.

In this way, we can treat rising prices as a political issue. For that is ultimately what they are.