Soaring corporate profits responsible for Europe's inflation crisis, IMF study finds

Soaring corporate profits responsible for Europe's inflation crisis, IMF study finds
Credit: Belga

Soaring corporate profits are principally responsible for Europe's inflation crisis, a recent report by the International Monetary Fund (IMF) revealed.

The study, which was released last week, noted that rising corporate profits were to blame for nearly half of European price increases since the start of last year.

It also argued that, if the eurozone inflation rate is to fall below the European Central Bank's (ECB) 2% target within the next two years, companies should aim to limit their practice of hiking prices by more than is strictly necessary to meet rising costs (otherwise known as 'greedflation').

"Companies increased prices by more than spiking costs of imported energy," the study noted. "Now that workers are pushing for pay rises to recoup lost purchasing power, companies may have to accept a smaller profit share if inflation is to remain on track to reach the European Central Bank's 2% target in 2025."

Headline inflation in the eurozone was 6.1% in May, down from 7% in April. Core inflation, which strips out energy and unprocessed food items and is widely believed to provide a better assessment of underlying inflationary pressures, remains above the headline rate at 6.9%.

Pointing the finger

The IMF study directly contradicts the analyses of other mainstream economists, who typically blame soaring energy prices and rising wages as the chief culprits behind Europe's high inflation rate.

According to the IMF, however, corporate profits were responsible for 45% of total price rises since the start of 2022, while rising import and labour costs accounted for only 40% and 25% respectively. (Taxes were found to have had a slightly deflationary impact, which explains why the aforementioned percentages do not add up to 100%.)

The report added that inflation-adjusted profits exceeded their pre-pandemic levels by 1% over the first three months of this year, while workers' wages fell approximately 2% below this threshold. "In other words, Europe's businesses have so far been shielded more than workers from the adverse cost shock," the report noted.

Arguably, the conclusion that corporate profits, rather than rising wages, are responsible for Europe's inflation crisis supports the conclusion – defended by numerous labour groups – that the ECB's attempt to curb inflation by hiking interest rates is ultimately misplaced.

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"It is now widely accepted that inflation is being driven by excess profits and not by consumer spending," European Trade Union Confederation General Secretary Esther Lynch said last month. "But raising interest rates does nothing to stop the profit-price spiral we're in and instead piles further pressure on struggling working people."

Intriguingly, however, this is not the conclusion endorsed by the IMF. Instead, it insisted that the ECB's policy should remain "tight" for the foreseeable future to "anchor expectations and maintain subdued demand".

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