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BOE Analysis Rejects Claims of Greedflation Profiteering in UK - BLOOMBERG

SEPTEMBER 01, 2023

(Bloomberg) -- Profitability for most UK companies has fallen since prices started soaring after Russia invaded Ukraine, according to Bank of England analysis that finds little evidence to support accusations of corporate “greedflation.”

Oil and gas firms have seen margins increase but they buck the trend of declining profitability for the private sector as a whole. In aggregate, over the five quarters from the start of 2022, the share of national output captured by excess profits has declined by 3.5 percentage points, the research found.

The labor share, which measures the proportion of GDP workers take in wages, has remained constant, a paper published on Bank Underground, a non-policy blog for BOE staff, showed. The study suggests price rises have been legitimate for business cost recovery and there has been little evidence of consumer price gouging.

Businesses have been accused of ripping off customers by using the cover of inflation to raise prices more than they need. There has been some evidence of the practice in the US and the European Union but less in the UK, where the inflation shock has been greatest and living standards have fallen most.

The BOE paper says that costs of capital, in rising interest rates, and costs of production more than account for the increase in consumer prices. Its analysis differs from more straightforward measures which suggest profit margins have returned to pre-energy shock levels.

The BOE said it used an “alternative measure of corporate profits to capture UK firm earnings in excess of all production costs.”

Excess Profits

“This measure has been declining since the start of 2022,” the researchers found. “This decline has not been uniform, however. Firms with higher market power have been better able to increase their margins; others have experienced large declines.”

The researchers cross-referenced their work against the BOE’s regular Decision Maker Panel survey of businesses. They found that “mark-ups,” another measure of profiteering, had also declined since the start of 2022.

In a speech at the weekend, BOE Deputy Governor Ben Broadbent said domestic inflation has been driven by workers and businesses competing to recover their lost income – in wages and profits - caused by higher import costs. Private-sector regular wages have risen 8.2% in the past year, the fastest rate in 22 years barring distortions in the pandemic, recent official figures showed.

Broadbent estimated that a steep rise in import prices in the two years to the third quarter of 2022, covering the pandemic and early months of the energy shock, has knocked 6% of real national income.

“Employees seek to defend real pay by bidding for higher nominal wages; firms protect the real value of profits by raising their own prices. Collectively this cannot succeed: the hit to real national income is what it is. But, in the meantime, the process fuels higher domestic and overall inflation,” he said.


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