After months of worrying about whether rising workers’ wages would keep inflation high, Europe’s central bankers have another concern: big corporate profits.
Companies that raise their prices higher than necessary to absorb higher costs could be fueling inflation that central banks must combat with higher interest rates, a European Central Bank (ECB) policymaker has warned, suggesting that governments they might need to intervene in some situations.
Policymakers must be alert to the risks of the so-called spiral of earnings and prices, said Fabio Panetta, a member of the ECB’s executive board. At a recent conference in Frankfurt, he pointed out that in the fourth quarter of last year half of the internal price pressures in the eurozone came from profits, while the other half came from wages.
Christine Lagarde, president of the ECB, and Andrew Bailey, governor of the Bank of England, have echoed their concerns. Although inflation in Europe has begun to ease from double-digit peaks last year, rates remain well above 2 percent, the target of most central banks. Eurozone public company profit margins — measured by net profit as a percentage of revenue — averaged 8.5 percent in the year to March, Refinitiv reports, a step down from the recent peak of 8.7 percent in mid-February. Before the pandemic, at the end of 2019, the average margin was 7.2 percent.
Companies may be raising prices because of higher input costs (the cost of producing their goods or services), because they expect future cost increases, or because they have market power that allows them to raise prices without suffering a loss of demand. Panetta said. Some producers may be exploiting supply bottlenecks or taking advantage of this period of high inflation, making it difficult for customers to be sure of the cause of price increases.
“Given the prevailing situation in the economy, there could be ideal conditions for companies to increase their prices and profits,” Panetta said.
There are sectors where “input costs are falling while retail prices are rising and profits are rising as well,” he added. “As a central banker, that’s reason enough to be concerned that there could be a rise in inflation due to higher profits.”
The average inflation rate for the 20 countries that use the euro has been falling for five months — to 6.9 percent in the year to March — but core inflation, which excludes volatile energy and food prices, a measure used by policymakers to assess how deeply inflation is being embedded in the economy, has continued to rise.
There is uncertainty about what will happen as energy and other commodity prices continue to fall: will companies refrain from raising prices further?
“To some extent, there has also been opportunistic action by some large manufacturers to increase their prices, sometimes in excess of their own cost increases,” said Christel Delberghe, CEO of EuroCommerce, a Brussels-based organization that represents wholesale and retail companies.
Panetta said governments should step in when necessary, partly because their fiscal support has helped keep profits high: “If there is a particular sector where market power is abused or there is not enough competition, then there should be policies of competition that should intervene”.
But it was also a message for companies.
“It must be clear to producers that strategies based on high prices that increase profits and inflation can be costly to them,” he added.
The cost? Higher interest rates.
By: ESHE NELSON
BBC-NEWS-SRC: http://www.nytsyn.com/subscribed/stories/6654087, IMPORTING DATE: 2023-04-10 21:10:06
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