Powerful companies exploiting markets that are not working effectively have made the cost of living crisis worse for most people, according to a report out this morning
Many large international companies were able to comfortably increase prices during the global inflation period, protecting or even driving up their profit margins, while ordinary families saw their real incomes wither away, according to a new report from IPPR and Common Wealth.
Energy companies like ExxonMobil and Shell, mining firms such as Glencore and Rio Tinto, and food and commodities giants like Kraft Heinz, Archer-Daniels-Midland and Bunge all saw their profits far outpace inflation in the aftermath of Russia’s invasion of Ukraine.
Because energy and food prices feed so significantly into costs across all sectors of the wider economy, this exacerbated the initial price shock – contributing to inflation peaking higher and lasting longer than had there been less market power, the report argues. Firms in other sectors such as tech, telecommunications and finance also saw high profit increases.
Such companies have been able to protect their profit margins or even increase them – setting prices higher than are socially and economically beneficial, and so generating ‘excess profits’ – through a combination of high market power and global market dynamics, the report says.
It builds on work by Isabella Weber, assistant professor at the University of Massachusetts, who has argued that profits in ‘systemic sectors’ can have an outsized impact on inflation across the wider economy. IPPR and Common Wealth researchers undertook the first multi-country analysis of corporate profits to explore this, analysing financial statements of 1,350 companies listed on the stock markets of the UK, US, Germany, Brazil and South Africa.
They discovered nominal profits averaged at least 30 per cent higher at the end of 2022 , compared to the end of 2019 (pre-pandemic).
Carsten Jung, senior economist at IPPR, said:
“Our research finds that markets aren’t working efficiently, enabling large companies to make profits that likely amplified inflation. This has made the cost of living crisis worse for most people, and for many smaller firms across the economy.
“The original inflation spike was driven by global supply chains gumming up post-pandemic, and then by the energy price shock following the Ukraine invasion. Now economists considering the knock-on effects of ‘home made’ inflation have been focussing too much on the labour market. In fact, most wage earners have taken real losses while many businesses protected their profit margins or even raised them. We should be scrutinising the role profits have played in amplifying inflation.
“Tackling excess profits also matters for our economic efficiency. If external shocks are made worse by business behaviour then new policy tools are needed to tackle this. Competition policy could be more proactive and excess profits could be taxed to align incentives. Most European countries – including the UK – have already started doing this. We should now think about how to expand our policy toolkit further to be better prepared for the next economic emergency.”
Chris Hayes, chief economist of Common Wealth, said:
“Inflationary shocks cannot be avoided, but they need not persist so long. Our analysis of companies suggests many large firms, beyond just the commodities sector, are using their power to preserve their profit margins. This pushes the shocks downstream to workers, consumers and labour-intensive industries that are less able to absorb them.
“This is not only unfair but has destabilised the economy and undermined growth. We need a new set of targeted and strategic macroeconomic policies to encourage companies to behave differently and bring down inflation, both now and in the future.”
