Soaring corporate profits were the largest contributor to Europe’s inflation, IMF admits

It’s not pay rises for ordinary workers that are fuelling the rise in inflation, it is corporate profiteering.

An image showing bank notes and pound coins

We’ve so often heard calls for hard-pressed public sector workers to show ‘pay restraint’, so that we can combat inflation. Indeed, the Governor of the Bank of England, Andrew Bailey, previously provoked outrage when he said workers should not ask for big pay rises.

Even in recent days, Prime Minister Rishi Sunak has hinted that he is unlikely to accept the recommendations made by public sector pay bodies for pay rises for public sector workers, including teachers and health service staff, in an attempt to tackle soaring inflation.

Millions of public sector workers who are struggling to make ends meet are expected to just put up with dwindling pay packets. And yet very little is said about the eye-watering corporate profits among those at the top that are driving inflation, with the Tories and right-wing press determined to keep the focus on those at the bottom and hard-pressed families.

Let’s be clear. It’s not pay rises for ordinary workers that are fuelling the rise in inflation, it is corporate profiteering.

Indeed, the IMF has admitted yesterday that ‘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’. The IMF claims that rising corporate profits played a bigger role in driving Europe’s inflation crisis than the energy shock caused by the war in Ukraine.

Speaking at a conference in Sintra, Portgual, Gita Gopinath, IMF’s deputy managing director said of corporate profits fuelling inflation: “If inflation is to fall quickly, firms must allow their profit margins—which have shot up  during the past two years—to decline and absorb some of the expected rise in labour costs.”

A look at the chart below shows just how much corporate profits have contributed to growing inflation.


The government has repeatedly sought to portray pay demands from unions and ordinary workers as something which could drive inflation further, against all the evidence.

If wage rises were causing inflation, or are the main risk for causing yet further inflation, as is claimed by some, then how do we explain the fact that inflation has already hit a 40-year high, despite wage stagnation?

What’s causing the current rate of high inflation isn’t wage rises, as the government and its defenders would have you believe, it’s soaring energy prices and profits on behalf of energy companies.

As Economist Professor Mariana Mazzucato told LBC earlier this year: “Inflation has three sources, it can be due to unit Labour costs, which are basically wages, that’s not the current source, there’s no excess demand in the system.

“It can be due to non-unit labour costs, in other words food and energy prices, yes that’s one of the main sources but also excess profits in the system, which allows large companies in mining and in energy, to earn excess profits through very very large mark ups and that is also one of the key sources right now of inflation”.

Basit Mahmood is editor of Left Foot Forward

Comments are closed.