Economists and political leaders at multilateral and European institutions have finally accepted that corporate profits are a primary driver of inflation today. But getting the analysis right is only the first step; now we need a fundamental change in how we address the problem.
AMHERST – Key officials have acknowledged that profits have been a major source of inflation in Europe – a realistic position informed by facts, rather than by the economics of the 1970s. Now that they have embraced a new analysis of what’s driving inflation, the policy response should change, too.
In recent months, the European Central Bank, the OECD, the Bank for International Settlements (BIS), and the European Commission have all published studies showing that profits have accounted for a large share of inflation. But the coup de grâce for doubters came on June 26, when the International Monetary Fund tweeted: “Rising corporate profits were the largest contributor to Europe’s inflation over the past two years as companies increased prices by more than the spiking costs of imported energy.”
What took so long? As ECB President Christine Lagarde told the European Parliament on June 5, “the contribution of profits to inflation … had gone a little bit missing,” because “we don’t have as much and as good data on profit as we do on wages.” Policymakers failed fully to appreciate the “transmission of the cost-push that was suffered by many corporate sectors into final prices.” But now, the problem has come clearly into view. While some sectors “have taken advantage to push costs through entirely without squeezing margins,” Lagarde explained, others have gone further to “push prices higher than just the cost push.”
AMHERST – Key officials have acknowledged that profits have been a major source of inflation in Europe – a realistic position informed by facts, rather than by the economics of the 1970s. Now that they have embraced a new analysis of what’s driving inflation, the policy response should change, too.
In recent months, the European Central Bank, the OECD, the Bank for International Settlements (BIS), and the European Commission have all published studies showing that profits have accounted for a large share of inflation. But the coup de grâce for doubters came on June 26, when the International Monetary Fund tweeted: “Rising corporate profits were the largest contributor to Europe’s inflation over the past two years as companies increased prices by more than the spiking costs of imported energy.”
What took so long? As ECB President Christine Lagarde told the European Parliament on June 5, “the contribution of profits to inflation … had gone a little bit missing,” because “we don’t have as much and as good data on profit as we do on wages.” Policymakers failed fully to appreciate the “transmission of the cost-push that was suffered by many corporate sectors into final prices.” But now, the problem has come clearly into view. While some sectors “have taken advantage to push costs through entirely without squeezing margins,” Lagarde explained, others have gone further to “push prices higher than just the cost push.”