The economic downturn the world has been bracing for still hasn't arrived, labor markets are still booming, and yet the economy feels bad. You can blame inflation for that one — and how much money companies are making off of you.," as companies have found that customers are willing to tolerate ever-increasing prices amid pandemic-era economic conditions like supply chain issues and scarcity.
IMF researchers Niels-Jakob Hansen, Frederik Toscani, and Jing Zhou find that domestic profits in Europe account for a little under 45% of inflation in the, while higher wages — which have been pointed to as a primary driver of inflation — account for just a quarter of inflation. Inflation is not solely caused by soaring profits, but the working paper finds that profits rising well above pre-pandemic trends have made their mark on European inflation. According to the IMF research, both labor costs and profits rose"significantly" above their recent averages — but profits made up a greater part of that. In particular, industries like trade, food, and travel saw their profits skyrocket, and contribute more to rising costs.
Factors like higher productivity — essentially firms getting more bang for their buck from their workers — has helped ease European inflation some through 2022, although productivity fell in the first quarter of 2023. To get inflation to where it needs to be in Europe, profit share would have to fall to its pre-pandemic average, the researchers found.