Rising corporate profits have emerged as a key driver of Europe’s inflation crisis, surpassing the impact of the energy shock caused by the war in Ukraine, according to analysis conducted by the International Monetary Fund (IMF). The research conducted by IMF staff reveals that profit increases accounted for nearly half of the eurozone’s post-pandemic inflation rate increase, with companies raising prices more than the spiking costs of imported energy.
This finding is likely to be seized upon by trade unions as evidence of “greedflation,” as they advocate for pay raises for their members. Gita Gopinath, the IMF’s deputy managing director, has called on companies to abandon efforts to protect their profit margins in the face of higher costs. She emphasized that for inflation to decrease rapidly, firms must allow their profit margins, which have risen significantly in the past two years, to decline and absorb some of the expected rise in labour costs.
The analysis by the IMF comes in the wake of British companies reporting increased profits. Associated British Foods (ABF), the owner of Primark, raised its outlook for the year, citing that shoppers had absorbed price increases for food and clothing. Despite the volume of goods sold remaining relatively flat, the value of ABF’s sales increased by 16% in the quarter to May 27. Eoin Tonge, the finance director, stated that the company had sacrificed some profitability to stay true to their consumers by not raising prices in line with inflation.
Inflation in the food sector has shown signs of easing, with supermarkets cutting the prices of household staples. Overall shop price inflation in the UK slowed to 8.4% in June from 9% in May, according to the British Retail Consortium. Food inflation also decreased to 14.6% in June from 15.4% in May, marking the second consecutive deceleration. These trends indicate that prices in shops may have reached their peak.
The IMF’s Gopinath emphasized that historical trends indicate workers are likely to raise their salary expectations in order to protect their level standard of living. Workers should experience some wage catch-up as they attempt to make up ground lost due to the pandemic. IMF experts noted that a 5.5% pay increase would be required to bring real earnings back to their pre-pandemic levels by the end of the following year. For inflation to reach the target level, however, the profit share of businesses would need to fall to its lowest level since the middle of the 1990s.
The impact of the inflation crisis extends beyond corporate profits and affects workers who are grappling with the rising costs of living. Many individuals find themselves digging into their savings to survive the economic pressures caused by inflation. As prices for essential goods and services increase, households face the challenge of stretching their budgets to cover daily expenses.
The challenge is that businesses can find it difficult to accept earnings declines, especially if the economy is still resilient. Additionally, employees may demand compensation for their actual salary losses. Such dynamics could impede the decline in inflation and exacerbate cost pressures and resource depletion. Companies like Sainsbury’s have promised to lower the pricing of their own-brand products and match those of its competitors in an effort to address the issue.
The government is also taking action. As the cost of living continues to climb, Chancellor Jeremy Hunt has met with the regulators of the grocery stores, water, electricity, and telecoms sectors to make sure savings are passed on to customers.
In conclusion, the inflation crisis in Europe has been mostly driven by increasing corporate profits, exceeding the effects of the energy shock brought on by the conflict in Ukraine. This analysis will probably be cited by trade unions as proof of “greedflation” and as justification for raising worker wages. The IMF urges businesses to accept declining profit margins in order to cover rising labor costs. For governments, corporations, and trade unions, striking a balance that addresses inflation concerns while preserving workers’ living standards and corporate profitability is still essential.
