“Excuseflation: Are companies increasing prices to boost profits?”

The price increase is no longer caused by energy price increases and perhaps companies are taking advantage of this to increase profits

In Europe and the United States, the prices of many products are continuing to rise, although many of the reasons that had caused the inflation in recent years have disappeared. For this reason, for some months now, many economists have been taking into consideration a hypothesis that until now was supported only by a minority of analysts: that companies are speculating on the general situation of price increases to obtain as many profits as possible, and that for this reason they have increased prices of goods and products much higher than would be necessary to cover the increase in costs.

In many industries, companies are, in practice, raising prices to take advantage of the fact that consumers seem willing to pay more, and are thus contributing to the rise in inflation in order to increase their profits.

This observation derives from the fact that many of the phenomena that had originally created an increase in costs for companies now seem to have ended: the pandemic is over, the world trade crisis seems to have resolved – which after the various lockdowns had caused a blockage of ports , an exceptional increase in the costs of maritime shipments, major slowdowns in the procurement of raw materials and numerous goods, which have consequently risen in price – and the cost of energy has also returned to acceptable levels, although it is still higher than before the war in Ukraine.

Today’s price hikes therefore seem rather unjustified and many analysts, including some of Bloombergbelieve that companies are arbitrarily deciding to continue to raise prices in order to further increase profits.

Despite the increases that there have been in production costs, the companies have managed to increase their profit margins in any case: by raising their selling prices, they initially protected themselves from the substantial increases in production costs, caused by the consequences of the pandemic and the war in Ukraine, but now the increases no longer seem justified. The idea that inflation, ie the general increase in the price level, is driven by corporate profits was previously only the preserve of more leftist economists, but now central banks are also taking it very seriously.

In recent months, consumers have accepted the substantial price increases because they considered them all in all justified by what was happening – first the pandemic, then the world trade crisis, finally the war in Ukraine and the increase in the cost of energy. It was therefore plausible that they should raise the prices of a little bit of everything. For this reason, consumers have been less sensitive to price increases and have not reduced the quantities purchased too much, as usually happens. Many of them also had the savings accumulated during the pandemic at their disposal, when they could not spend their money on activities that were prohibited by the restrictions at the time, which helped to not make them worry too much about price increases.

Furthermore, many people really had no idea what inflation was because they had never experienced it firsthand: such price increases have not been seen since the 1980s and not everyone was able to understand that the increases they noticed were very higher than what was needed to compensate for the increases in production costs for companies.

– Read also: What is inflation, explained

Two journalists from Bloomberg they created the term excuseflationfrom the crasis between excuse – i.e. excuse, pretext – e inflation – inflation: in many cases, real inflation, i.e. the price increases that actually took place, was a pretext used by companies to raise prices more than was necessary, and in this way obtain greater profits.

This can be seen from some phenomena. First, corporate margins have actually risen sharply as inflation has risen. The operating margins of large listed companies – i.e. the percentage of profit on total sales – have risen even if energy companies are taken out of the calculations, those that notoriously increased their earnings due to the increase in the cost of gas and oil : compared to before the pandemic in 2022 they are significantly higher in both Europe and the United States.

And relationship of the European Central Bank shows that in the last quarter of 2022 corporate profits were 9.4 percent higher than in the previous year. The study explains that “the high costs of production (for example those of energy) have made it easier for companies to increase their profit margins, because at the same time they make it more difficult to establish [per il consumatore, ndr] whether higher prices are caused by higher costs or higher margins. Companies aim to recover lost earnings where possible and the high inflation environment may provide a good opportunity to do so.

The report indicates that wages also contributed to some of the general price increase over the same period, but to a much lesser extent than profits: in the last quarter of 2022 wages increased by 4.7 per cent, half as much how much corporate profits have increased.

For months, central banks around the world have been raising key interest rates to fight inflation. This comes at a price: Raising interest rates has a deliberate goal of slowing the economy, hence rising prices, and central banks walk a fine line between slowing the economy and potential recession. But if prices are rising because companies try to increase profits, this monetary policy is not effective and risks producing only damage.

In a’interview al New York Times Fabio Panetta, member of the Governing Council of the ECB, i.e. the body that takes all monetary policy decisions such as the increase in interest rates, said: «I’m not here to pass judgment on whether this is right or unfair , but to investigate the causes of inflation. In some industries, production costs are falling while consumer prices are rising, as are profits. The fact that there may be increases in inflation generated by increases in profits worries me as a central banker.

– Read also: Why central banks raise interest rates

The fact that inflation is no longer driven by increases in production costs can also be seen in a particular trend of inflation in the Eurozone and in various countries that make it up. General inflation, i.e. the index that measures the general price increases on a monthly basis compared to the previous year, has been decreasing since October. The fact that inflation is falling today does not mean that prices are falling: in that case inflation would be negative and would be called deflation. Instead, it means that the increase in prices was less intense than in the previous month: if in March 2022 a product cost 100 euros, today it costs 103.3, which is still increasing.

The reasons for this reduction are various and the most relevant is of a statistical nature. In fact, the inflation rate is calculated in mobile terms: the prices of March 2023 are compared with those of March 2022, those of February 2023 with those of February 2022 and so on. The starting point is therefore always different and, since last year inflation rose a lot especially from March onwards, the comparison is gradually made with months in which prices were already starting to rise substantially.

The annual inflation for March, for example, is calculated by comparing today’s prices with those of March 2022, i.e. the first month of the war in Ukraine, the event that caused a huge increase in energy prices and therefore in general of a little bit of everything. Today energy prices have returned to lower levels almost everywhere, but by comparing general inflation with so-called core inflation – the one obtained by removing food and energy prices from the general index, i.e. the most volatile ones very susceptible to sudden movements – it turns out that the inflation rate is still very high.

This means that energy cost increases no longer explain price increases: they can also be explained by an economy that is doing quite well, where consumer demand is higher than companies are able to produce, but also by the fact that companies are continuing to arbitrarily increase their selling prices.

Further proof of the fact that prices no longer follow the increases in production costs is linked to the trend in food prices.

The FAO index is a monthly measure of the international prices of a group of food commodities such as grains, vegetable oils, dairy products, meats and sugar. It well represents what is happening in the food market on a global scale, overall but also by individual product category. After constant increases since the end of 2020, the index has been declining sharply since May 2022. Despite this, the final prices that consumers pay, as measured by Eurostat inflation on food, are still increasing.

– Read also: Is the world trade crisis ending?

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