Inflationary crisis driven by rising corporate profits, says IMF

The IMF's Geeta Gopinath said companies should allow profit margins to fall to bring down inflation. Photo: Jason Alden/Bloomberg

According to the analysis of the International Monetary Fund (IMF), the growth of corporate profits played a greater role in the development of the inflationary crisis in Europe than the energy shock caused by the war in Ukraine.

The increase in profits amounted to almost half the increase in post-pandemic inflation in the eurozone, according to a study by IMF staff, as «companies raised prices not only for a sharp increase in the cost of imported energy.»

The study is likely to be taken up by unions as evidence of «greed» because they demand higher wages for their members.

Gita Gopinath, Deputy Managing Director of the IMF, urged companies to abandon efforts to protect their margins in the face of higher costs.

Speaking at a conference in Sintra, Portugal, she said: “If inflation is to come down quickly, firms should allow its profit margin, which has risen sharply over the past two years, to decline and offset some of the expected rise in labor costs.

This comes after a number of UK companies reported higher profits over the past few months.

On Monday, Primark owner Associated British Foods (ABF) raised its full-year guidance on Monday, saying buyers have embraced higher prices for food and clothing.

The company said its value of sales rose 16% in the quarter to May 27, although the volume of goods sold remained largely unchanged.

Eoin Tonge, chief financial officer, insisted that the business still sacrificed some profitability even with this increase. He said: “We did not raise prices in line with inflation. We have decided to fully cap our margins to stay true to our consumers.”

Separate data showed that food inflation eased for a second month as supermarkets slashed prices for essential household items, while economists said , the recommended prices in stores have reached their peak.

Overall, store price inflation slowed to 8.4% in June, declining. from 9% in May, according to the British Retail Consortium.

Food inflation slowed to 14.6% in June from 15.4% in May, the second consecutive slowdown in the food category .

>Ms Gopinath said history suggests that workers were likely also raising wage demands in an attempt to protect living standards. She said, «Some salary increase is to be expected.»

IMF researchers Niels-Jakob Hansen, Frederic Toscani and Jing Zhou added that if wages increased by 5.5 percent, this would be necessary to lower real wages. to its pre-pandemic levels by the end of next year, company profit shares must fall to their lowest level since the mid-1990s for inflation to return to its target.

Ms Gopinath warned that companies are likely to resist any decline in profits, “especially if the economy remains strong while workers can claim their losses in real wages.

These dynamics will slow the decline in inflation and are likely to support expectations and increase susceptibility to further increases in costs or pressure on resources.”

Sainsbury's announced this week that it will invest £15 million in price cuts. private label products from Tuesday, as well as price cuts for jam, honey and corn flakes. Chicken breast prices will also match those of Aldi for the first time.