There is a chart in the Bank of England’s latest report on the economy which illustrates that price gouging may still be a factor in pushing up inflation.
What unions and academics have complained about for more than two years – and policymakers at the central bank have downplayed – is that corporate profits could be pumping up inflation as much as rising wages.
The chart tells us that prices in the shops are rising when the costs of production remain much the same. Customers are paying 8% more for their goods than last year, despite an easing of supply chain pressures and a fall in commodity prices that mean it costs no more to produce goods now than it did in the summer of 2022. Producer price inflation is close to zero.
It is the first time such a gap has opened up since the 2008 financial crash, and the Bank says it is struggling to find an answer. Usually, a competitive market for goods means that a fall in the wholesale price leads to a fall in the retail price.
As the Bank says in the report: “That relationship would suggest that goods price inflation could decline sharply in the near term.”
But its forecasts appear to accept the gap will continue, because it thinks other factors are at play – and not just greedy businesses, mostly large and with a strong marketing presence, making sizeable windfall profits.
Chief among the other factors are energy costs, which the figures for factory prices exclude. The report argues that while the price of gas and electricity has fallen steeply this year, it is possible a majority of companies were panicked into buying long-term, fixed-price energy contracts when prices were high, and those contracts have yet to run out.
Manufacturers are heavy users of gas and electricity, and so it could be that their costs are high compared with a year ago and it is legitimate for them to continue passing on the difference to their customers.
The data also excludes the impact of rising import prices, leaving companies that rely on foreign partners for components in a worse position than those that source components from domestic suppliers.
Officials at the Bank think these reasons are more likely than price gouging, although they concede firms may be jacking up prices for a last hurrah before consumers cotton on to the idea that inflation is not a thing any more and that price rises should not be tolerated.
“It is possible that consumer-facing firms have sought to rebuild margins. But there is not much evidence at the whole-economy level that firms have increased their margins so far,” the Bank says.
That would seem to flatten the idea of greedflation. Margins are the same, so nothing to see here.
Yet margins being the same is a huge boon for businesses. To have maintained margins in a period as difficult and uncertain as the last three years is a colossal victory.
And stable profit margins must mean higher prices above and beyond the increase in running costs. Otherwise margins would fall.
Nestlé and Procter & Gamble, which fill UK supermarket shelves with their products, are the clearest examples of firms that have maintained or improved margins, allowing them to maintain dividends throughout the crisis period. There are plenty more highlighted in research by the Unite union, based on analysis of company reports.
In the spring, Which? made an assessment of supermarket food prices and found Aldi and Lidl were to blame for the steepest increases in everyday groceries. The price of some items had doubled in a year, the consumer champion said. Asda, Morrisons, Ocado, Sainsbury’s, Tesco and Waitrose all took their lead from the German discounters.
They are cutting prices now, and margins are suffering a little, but not to the extent that they have fallen to anywhere near pre-pandemic levels.
The Bank of England doesn’t ask questions about the profits made by businesses that make the goods and services that drive inflation. It waits to see data from the Office for National Statistics (ONS) about company profitability before making a judgment.
The ONS will produce the latest wages data this week for the year to June. By contrast, the profitability data is eight months out of date. Nevertheless, it shows margins stable over the two years to the end of December 2022 – a period when household incomes were falling.
There must be a reason the Bank focuses on labour and not capital when it makes its assessment of prices across the economy, and it won’t be the timeliness of the data.
Governor Andrew Bailey must have called for wage restraint 10 times for every one he has mentioned companies and their profits. It’s a bias that deflects from one of the main causes of inflation and should be corrected.