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Major Companies Amplify Inflation by Passing on Cost Increases, Says Report

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Major Companies in Energy and Food Sectors Amplified Inflation in 2022, Report Finds

According to a new report by British think tanks the Institute For Public Policy Research and Common Wealth, major companies in the energy and food sectors have played a significant role in amplifying inflation in 2022. The report, released on Thursday, argues that these companies passed on greater cost increases than necessary, leading to higher and more persistent inflation, particularly in the oil and gas, food production, and commodities sectors.

The authors of the report conducted an analysis of financial reports from 1,350 companies listed in the UK, US, Germany, Brazil, and South Africa. They found that nominal profits were, on average, 30% higher at the end of 2022 compared to the end of 2019. While this does not necessarily mean that overall profit margins have risen, it does indicate that consumers have shouldered the burden of higher prices.

The report highlights the influence of market power held by certain corporations in exacerbating inflation. The authors argue that companies with temporary market power, particularly those emerging in the aftermath of the pandemic, have been able to protect their margins or even generate excess profits by setting prices higher than what is socially and economically beneficial.

However, the report emphasizes that corporate profits were not the sole driver of inflation and did not cause the energy market shock following Russia’s invasion of Ukraine in February 2022. It suggests that “market power” has not been adequately addressed in the current debate surrounding the causes of inflation, especially in comparison to the impact of the labor market and rising wages.

“In an energy shock scenario, if costs were equally shared between wage earners and company owners, one would expect the rate of return to fall as firms do not increase prices fully to make up for higher costs, and wage earners do not fully keep up with inflation. But this is not what happened. A stable rate of return – for example, as seen in the UK – suggests pricing power by firms, which allowed them to increase prices to protect their margins,” the report states.

The report identifies companies such as Shell, Exxon Mobil, Glencore, and Kraft Heinz as among those that have seen profits “far outpace” inflation. CNBC reached out to Glencore for comment, but the company declined to respond. The other companies mentioned did not provide any comments either.

The rise in inflation began in mid-2020 due to various factors, including global supply chain constraints, volatile food production conditions, tight labor markets, pandemic stimulus measures, and the Russia-Ukraine war.

The concept of “greedflation,” where companies raise prices more than necessary to protect margins from higher input costs and market movements, has been a topic of debate. Some analysts, along with policymakers like European Central Bank President Christine Lagarde, have suggested that greedflation may be a contributing factor to inflation.

However, defining what constitutes greedflation is not straightforward. Earlier this year, the CEO of UK supermarket giant Tesco suggested that some food producers may be raising prices more than necessary, which could fuel inflation. The industry strongly denied these claims.

In November, economists at the Bank of England published a blog post stating that they found “no evidence” of an overall rise in profits among companies in the UK. They argued that prices have risen alongside wages, salaries, and other input costs, with a similar trend observed in the eurozone. However, they noted that companies in the oil, gas, and mining sectors have experienced varied levels of profitability.

The report sheds light on the role of major companies in contributing to inflation and calls for a deeper examination of market power in the ongoing discussions about its causes. As the debate surrounding inflation continues, it remains crucial to consider the various factors at play and their impact on consumers and the wider economy.

More detail via CNBC here… ( Image via CNBC )

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