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24 March 2023

Britain’s rising inflation has a hidden cause: corporate greed

Inflation has risen to 10.4 per cent, driven in part by corporate profit-seeking.

By Will Dunn

When Heinz first brought its tinned baked beans to the UK in 1886, they were sold in the exclusive London food store Fortnum & Mason for the princely sum of ninepence a can – about £3.57 in today’s money (we could have a longer discussion about purchasing power, but let’s not). Productivity growth reduced the cost of beans until, during the Baked Bean Wars of the 1990s, they were sold (as a loss leader) for 3p a can. Now, with some cans rising by 79 per cent in a year, the classic 415g tin of Heinz beans is, at £1.40, no longer synonymous with frugality.

The question is, is this the result of inflation – which rose to 10.4 per cent in February, driven by an 18 per cent rise in the cost of food – or the cause of it?

Heinz says its price rises (which include a 60 per cent increase in the price of ketchup) reflect increased production costs. But Andrew Bailey, the governor of the Bank of England, appealed to companies this morning via the Today programme: “to people who are setting prices – please understand, if we get inflation embedded, interest rates will have to go up further and higher inflation really benefits nobody”.

Bailey’s warning adds to the observations of other economists, including the European Central Bank, and businesses including some supermarkets, who argue that say that many of the items in the basket of goods used to calculate inflation are rising in price not because of monetary policy or the war in Ukraine, but because the companies that produce them have seen an opportunity to increase profits.

The manufacturers of these products aren’t exactly feeling the pinch. At the ketchup behemoth Heinz Kraft, the company’s yearly outlook warns against the impact of inflationary pressures, the war in Ukraine and the likelihood of a global slowdown, but it also predicts earnings growth of 4 to 6 per cent for 2022. The company made $1.843bn in profit for the three months to the end of September 2022, its accounts show, which is less profit than it made in 2021, but at a gross margin of over 30 per cent it’s not what you’d call a crisis.

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Dolmio sauces are made by Mars, a private company which doesn’t have to say as much about its finances, but which overtook Coca-Cola in revenue last year, its growth adding billions more to the estimated $160bn combined fortune of the Mars family.

While the input costs (including energy, shipping, ingredients, wages and finance) ­of producing ketchup and pasta sauce have obviously risen, both Heinz Kraft and Mars have been criticised by other businesses for price increases that have been characterised as unnecessarily inflated. Over the summer Tesco began publicly negotiating with both companies over high prices, telling the press: “We will not pass on unjustifiable price increases.”

That was good PR for Tesco, which markets itself as doing everything it can to keep prices low for customers (if they’ve got a Clubcard, anyway). But the retail giant is not a charity: it has a fiduciary duty to its shareholders, who have received a dividend yield of over 10 per cent this year on the back of several years of rising revenue from a shrinking number of employees.

In general, companies are protected from inflation by the market. “Firms are able to cover higher costs with higher prices,” explains David Spencer, professor of economics at Leeds University. “This is helping to maintain firm profitability while real wages fall.”

[See also: The death of the £3 supermarket meal deal signals a grim new era]

A big economic event also gives businesses a story they can tell about why prices need to rise. The introduction of the euro is a good example: exchange rates were fixed in advance and economists expected no change in consumer behaviour, but for millions of business owners it was a choice between rounding down and rounding up. In Germany the currency became known as the Teuro, a pun on teuer (expensive), and in 2002 the finance minister, Hans Eichel, was forced to admit that restaurants and other businesses had “done rather well for themselves” as they switched menus.

The Covid-19 pandemic was another such event. At first it was an excuse for doing less: crap customer service, delays and closures were for a while tolerated by consumers who were under the impression that everyone was in it together, although obviously some people were in it to a much greater degree than others. As disrupted supply chains and the increased demand for goods unleashed inflation at a rate not seen for a generation, the situation morphed into an excuse to charge more.

We can now see the results of this in the other prices that are rising across the economy. In April the Competition and Markets Authority reported that “average markups have increased since 2008 from just over 20 per cent to about 35 per cent”. In June the trade union Unite looked at the earnings reported by the companies in the FTSE 350 index of the UK’s largest publicly traded companies (excluding investment trusts and energy companies) and found that profits had risen during 2021 by an average of 42 per cent.

Share buybacks and dividends – which benefit shareholders and prop up share prices – are another sign of companies doing well, and 2022 was a bumper year for both: the FTSE 100 has already announced a record £50.3bn in share buybacks and is expected to pay out £81.5bn in dividends, according to AJ Bell, the investment services company.

This is also reflected in chief executives’ pay, which remuneration committees typically set based on financial performance. The median FTSE 100 chief executive received a 39 per cent pay rise in 2021, taking their total earnings to £3.41m, the High Pay Centre has reported.

The measures to restrict “profit-push” inflation (or “greed inflation”, as it’s sometimes known) are controversial. Price restrictions can be counterproductive, as they do little to dampen demand – there will be plenty of wealthy people keeping the boiler roaring this winter thanks to a state-imposed price control on gas. The answer may be in the tax system, which is much more generous to the wealth accumulated from company profits (dividends and capital gains) than the income from work.

In the long run, a failure to address this problem could cause a longer and deeper recession. “Lower real wages will place a drag on demand and hasten a recession,” says Spencer, “and a rise in strike action may be the response to profiteering by firms. There are better, more equitable ways to deal with inflation.”

[See also: It’s time to stop kidding ourselves the Bank of England can control inflation]

This article was originally published in November 2022. It has been updated with the latest information.

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