IMF blames greed for rising prices

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By Steve Goldstein

The International Monetary Fund – that scourge of the left to demand that struggling countries adopt austerity policies in return for loans – says it’s really corporate profits, not labor costs , which are driving up inflation in the euro area.

“Rising corporate profits account for almost half of the rise in inflation in Europe over the past two years, as companies raised prices by more than soaring imported energy costs,” he said. said a blog post outlining a new research paper written by three economists, as the Central Bank’s annual conference in Sintra, Portugal kicked off.

The IMF doesn’t use the word “greed” in its missive, but it fits the idea that it’s companies, not workers, who are responsible for rising prices. In the Eurozone, the latest data shows prices rising 6.1% year-on-year, still well above the target, but below the 10.6% peak.

This document indicates that profits account for 45% of the price increase since the start of 2022, compared to 40% for import costs and 25% for labor. (According to the IMF, taxes had a slightly deflationary impact, to explain why the percentages exceeded 100%.)

Indirectly, the IMF says it wouldn’t even mind if workers got wage increases – if companies responded by not raising prices any further. “Not that workers are pushing for wage increases to recoup their lost purchasing power, companies may have to accept a smaller share of profits if inflation is to stay on track to hit the 2 % of the European Central Bank in 2025, as predicted in our most recent world economic outlook,” the IMF said.

In her speech launching the Sintra event, IMF First Deputy Managing Director Gita Gopinath reinforced this message, but only with cursory mention. “All other things being equal, if inflation is to fall rapidly, businesses must allow their profit margins – which have soared over the past two years – to decline and absorb some of the expected rise in costs. labor,” she said.

The ECB has raised rates to a 22-year high of 3.5% and promises further action. In her last press conference, ECB President Christine Lagarde detailed her understanding of why inflation has risen.

“To oversimplify: energy played a big role, then food came into play, and energy is fading now, has now moved in May and is in slightly negative territory. But work, and wages in particular, play an important role as a driver of inflation,” she said.

She clarified while speaking to another reporter. “The only thing I’m trying to say here is that we need to avoid what I’ve called tit-for-tat where, in response to inflation, companies and workers want to receive full compensation – which obviously could lead to that second-round effect that I was referring to,” she said.

Lagarde in front of the European Parliament was a little more willing to entertain the idea of ​​greed. She spoke of “these sectors took advantage to push costs through entirely, without compressing margins, and – for some of them – to push prices higher than the simple cost push that would have resulted from imported inflation. “.

As for the sectors, she said “it’s agriculture, it’s construction, some service activities, and I think it’s important that competition authorities can really look at that behavior.”

-Steve Goldstein

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(END) Dow Jones Newswire

06-27-23 0400ET

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