The past two years have been economically tumultuous. Advanced economies emerged in remarkably good shape from the paralysis of a formidable and unprecedented pandemic, only to be knocked sideways by the gas price shock. The ensuing inflationary episode – resulting in real-wage declines, interest rate hikes and capital misallocation – was the result of a failure to contain this shock and its distributive consequences. Instead, we have allowed it to amplify throughout the economic system.
By and large, policy has treated this according to the conventional model of a so-called wage-price spiral, whereby inflation is perpetuated by the wage demands of workers trying to recover their purchasing power, raising both labour costs and consumer demand beyond what current prices can handle. Contractionary policy aimed at choking off wage gains is treated as the only exit from this vicious cycle; the initial catalyst of the energy crisis is deemed both beyond policymakers’ power and inconsequential to the task of breaking the cycle.
But in a departure from this orthodoxy, there is a creeping recognition – among the popular press, central bankers and (increasingly mainstream) academics – of the role played by corporate profits in contributing to inflation. A crude, moralising version of this, termed “greedflation”, bemoans a rampant bout of widespread profiteering. But a more sophisticated version – better-termed “sellers’ inflation”, articulated most influentially by the University of Massachusetts Amherst economists Isabella Weber and Evan Wasner – describes a granular multi-stage process, each affecting different sectors differently, and with varying levels of agency.
This account begins with impulse: a specific price spike, owing to bottlenecks and sudden scarcities, leads to windfall gains upon (often passive) key sectors, usually higher up the supply chain. Attempts to preserve margins further down propagate the shock into other goods. A small but consequential subset may then opportunistically exploit this ambient backdrop of inflation to enhance their profit margins, passing on to consumers more of the cost shock than people realise is necessary, which amplifies the process. Finally, in a less significant stage, which more closely resembles the wage-price spiral of orthodox economic theory, conflict between labour and capital ensues as wages try to catch up.
New research from the think tanks Common Wealth and IPPR empirically corroborates this account. The report analyses more than 1,300 publicly listed firms from five large economies’ main stock indices – US, UK, Germany, Brazil and South Africa. We find not only that pre-tax profit margins have, on average, risen relative to the pre-pandemic period in all five markets, but also that they have sharply bifurcated between industries along the lines anticipated by Weber and Wasner.
As expected from volatile sectors mediated by speculative commodity traders, the top end of the supply chain has made a killing – not just big oil, but mining firms like Glencore and Rio Tinto, and, interestingly, agribusiness giants like Archer-Daniels-Midland. But sectors slightly further down – such as manufacturing, construction and wholesale trade – have managed to parlay their higher input costs into moderately higher margins than before. If workers, consumers and shareholders were to shoulder this input inflation equally, then we ought to see diluted margins; instead these industries have enjoyed the opposite. Earnings call transcripts provide candid testimony to their pricing motivations. Meanwhile, low-wage, labour-intensive service sectors downstream have suffered devastating squeezes. Perversely, these firms are precisely where the bulk of the workforce is concentrated, inhibiting labour’s ability to recover its losses through increased industrial militancy alone.
There are of course caveats. Major stock indices invariably comprise large multinationals and therefore do not map closely on to national economies. They also skew the sample away from those small- and medium-sized businesses likely on the sharp end of this margin bifurcation. Meanwhile there is some international variation: these sample issues are perhaps most pronounced in the UK, where national statistics suggest a smaller aggregate contribution than in the US or Europe. But the cross-sectoral dimension is clear.
Under these erratic conditions, profits cease to be a meaningful signal of where capital can be productively invested, while purchasing power is arbitrarily siphoned away from all the places it is needed. Orthodox macroeconomic policy has become not just ineffective but actively destructive. Economic stabilisation demands a broader and more targeted toolkit. This includes wholesale electricity market reform, windfall taxes, tiered bank reserves, and a more activist competition policy. Other countries have experimented with these tools with positive results. Following suit is a matter of urgency.