Profits the biggest driver of inflation in Europe

From Geopolitical Economy

Corporate profits have been the biggest contributor to inflation in Europe since 2021.

This is according to a study published by the International Monetary Fund (IMF).

“Rising corporate profits account for almost half the increase in Europe’s inflation over the past two years as companies increased prices by more than spiking costs of imported energy”, wrote IMF economists this June.

The IMF said “companies may have to accept a smaller profit share if inflation is to remain on track to reach the European Central Bank’s 2-percent target in 2025”.

IMF economists Niels-Jakob Hansen, Frederik Toscani, and Jing Zhou detailed their findings in a research paper, “Euro Area Inflation after the Pandemic and Energy Shock: Import Prices, Profits and Wages”.

They found that domestic profits were responsible for 45% of the average change in the consumption deflator (inflation) from the first quarter of 2022 to the first quarter of 2023, whereas rising import prices [i.e., fuels and commodities] contributed 40%.

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Governments might do much better to increase competition by splitting up monopolies and oligopolies than by raising interest rates.