The head of the European Central Bank, Christine Lagarde, has warned businesses for months that excessive wage increases will only push inflation higher. A warning to which employers listen carefully. But now, to warn the ECB itself, it’s no longer salaries that are at stake, but the massive profits companies have amassed in recent months. And in 2022, payrolls more than doubled. According to economists in Frankfurt, it is the race to accumulate profits that is the main cause of price increases today.
The authors of an article on the ECB blog write about this quite frankly, including Oscar Arce, managing director of Frankfurt Economics. “In the fourth quarter of 2022 unit profits increased 9.4% year-on-year and contributed more than half to domestic price pressures in that quarter, while unit labor costs increased 4.7% and contributed less than half,” the article says.
The crux of Arce and his colleagues’ reasoning is a bit of a blow to the rim and the barrel: after emphasizing the need to not be too generous in terms of salary increases, Frankfurt is now trying to rebalance it. the burden of inflation liability by pointing fingers at employers. “High energy prices crushed real revenues – the article continues – How to distribute these losses has been at the center of recent negotiations between companies and workers. Could this cascade be triggered if both parties unilaterally try to compensate for any loss in real income wages?” and it risks price increases and an upward spiral that could make everyone poorer.”
However, it becomes clear from the accompanying charts that the most pressing issue to address right now is the weight of the boom in surplus profits on price increases for consumers. When you look at sectors such as agriculture, manufacturing and services, the increase in profits was 10 times the increase in salaries. The increase in wages in the industry was close to zero, while the increase in profit was over 15%. In agriculture, the ratio is 2 to 25.
El Pais remembers the opposite of what the ECB had predicted until last February, when the most popular thesis was that “an economic slowdown will reduce corporate profits” last February on the occasion of a central bankers meeting. The Spanish newspaper also explains, “This is because demand exceeds supply in many industries, which is limited by increases in raw material prices or a lack of manpower.”
But something did not go as expected: According to the ECB, many companies are trying to make up for losses incurred during the pandemic by taking advantage of the context of high inflation. But among them are those who have not suffered the repercussions of Covid-19 (think agri-food), but continue to inflate their profits at a decidedly higher rate than wages. “The impact of earnings on domestic price pressures has been dramatic from a historical perspective. Orcel and colleagues acknowledge that, on average, unit gains from 1999 to 2022 contributed about one-third of that, while “in 2022, they contributed an average of two-thirds.” As earnings and wages do not slow, the ECB’s target of bringing inflation to target on time will be more difficult. And that may require a stronger political response,” the article concludes.
Source: Today IT
Roy Brown is a renowned economist and author at The Nation View. He has a deep understanding of the global economy and its intricacies. He writes about a wide range of economic topics, including monetary policy, fiscal policy, international trade, and labor markets.
