Corporations are much more willing than usual to raise their prices lately, and that is placing a greater burden of high inflation on consumers.
This may not come as a big surprise to anyone who’s browsed the aisles of a grocery store, kicked tires at a car dealership, or filled up a tank of gas lately, but even the Bank of Canada is starting to notice the trend. , as the central bank continues its battle to subdue inflation.
Speaking before a parliamentary committee in Ottawa this week, the bank’s governor, Tiff Macklem, told lawmakers that the bank has noticed a worrying new trend emerging from the corporate sector.
For much of the last few decades, whenever companies saw an increase in their input costs (the amount they pay for things like raw materials, energy, and even workers) “they were quite cautious about passing on [that cost into] the prices they charged for goods and services,” Macklem said.
Their reasoning was simple: they were afraid of losing customers.
But in this episode of high inflation, the bank has noticed that corporations are not as concerned about doing that as they normally are.
“When input prices have risen… those are being passed on much more quickly to the prices of final goods. So households are bearing much more of the full inflationary impact – that’s what we can see quite clearly in the data”.
Asked to what extent Canada’s current inflation problem can be attributed to price increases beyond business cost increases, Macklem said, “I don’t think we can put a number on it,” but other central bankers They have shown themselves much more willing. .
In a speech this summer, Christine Lagarde cited data from the European Central Bank that she heads showing that over the 20 years leading up to 2022, corporate profits were responsible for about a third of inflation.
Last year, however, that proportion jumped to two-thirds, meaning that despite legitimate increases in the cost of doing business, the share they take of every consumer dollar effectively doubled.
“Companies cannot continue to exhibit the pricing behavior we have seen recently,” she said.
Paul Donovan, a London-based economist at Swiss bank UBS, says the scenario described above is what’s known as “profit-driven inflation” and he’s been waving warning signs about it for most of the past year.
While it has been exposed to varying degrees in various places around the world, the only condition it requires is a strong narrative: consumers have to believe en masse that price increases are justified, or they will not accept them.
“Profit-driven inflation works until it doesn’t, and the point at which consumers begin to rebel against profit-driven price increases disguised as other factors tends to be a turning point with a twist.” abrupt,” he told Breaking: in an email.
While he emphasizes that he is not familiar with the situation in Canada, he says that in Europe there is ample evidence that consumers have reached that tipping point of saying “enough is enough” and the best place to look is very familiar to consumers. Canadians: in the supermarket aisle.
Last month, the British Retail Consortium noted that “fierce competition among retailers” caused UK food prices to fall monthly for the first time since 2021. Donovan says this is no coincidence, as major chains have started offering deep discounts to their most loyal customers after the latter group began abandon them.
“In recent months there have been aggressive price discounts, but they apply to people who have loyalty cards,” he said. “Consumers in the UK have become less willing to believe the narrative of why prices were rising, and supermarkets are keen not to alienate customers and are therefore seeking to shore up their loyalty through the scheme. privileged discounts”.
Data from the United States shows evidence that price increases may have also gotten ahead of themselves. TO report from the Federal Reserve Bank of Kansas City calculated that margins rose 3.4 percent in the United States in 2021, enough to make them responsible for up to half of the increase in the US inflation rate that year.
Jim Stanford, an economist and director of the Center for Future Work, says it’s refreshing to see central bankers beginning to recognize that corporate profits have played a disproportionate role in inflation, because for too long Canada’s economic discourse has been trying to blame everything but that.
The burden falls on consumers
“Tiff Macklem has been talking non-stop about so-called overheated labor markets for the last two years,” he told Breaking: in an interview. “And now I think they’re finally recognizing that that’s not the story, or certainly not the whole story.”
Advice to consumers for much of the past year has boiled down to trying to cut spending or increase income, but Stanford says it’s misleading to put the onus of solving inflation on consumers since they bear the burden. disproportionate. of it.
“There is evidence that consumers are being exhausted,” he said, noting that sales at grocery stores and Overall retail sales are now declining in volume terms. for at least the last three months.
“I’m reluctant to say that consumers simply need to get better at purchasing. I’ve heard that advice from a dozen people. [but] “I think it’s unreasonable to expect that somehow consumers will have to solve the problem by becoming bargain hunters and spending half their week looking at grocery store brochures.”
It cites data from Statistics Canada showing that at one point last year, the cost of a unit of labor had increased just over 10 per cent since the start of the pandemic. Meanwhile, profit per unit increased more than 70 percent over the same time period.
But the good news, Stanford says, is that the trend is beginning to reverse.
“The last two quarters in Canada have seen a partial but significant return of profitability to normal levels,” he said.
“This actually reinforces the story that earnings had a lot to do with that burst of post-pandemic inflation because on the way up, earnings and prices were going very close together and on the way down they’re also going down together.”