Corporate profits account for almost half the increase in Europe’s inflation

It's worth noting that this mostly reflects short-term pricing power. It takes a lot of time for new competitors to enter any industry. So we should expect these price increases to occur rarely and be somewhat time-limited as competition ultimately reestablishes itself.

Governments etc. argue that employees should not demand higher pay to match inflation to avoid a "spiral" out of the goodness of their hearts.

If employers catch the absolute currency value increase of inflation the employee employer balance is shifting.

Don't live in some day dream about what modern marketing can make the chimp brain do.

Yes, but let's remember this next time they are whinging about taxes, labor rights, and anti-trust measures, k?

Profits by definition are not passed upstream, as profits are what remains after you take out costs from revenue. Anything that gets passed upstream comes from costs

Some prices (mostly services) can be adjusted, some could be (rents, housing, mostly by rezoning and building more), but due to "reasons" (mostly local and national governments holding back) they aren't (until someone compares the average pension to average rent and instead buys a sniper gun and finds the responsible politician). Some prices are also stuck due to politicians doing their dick-measuring competitions ending in sanctions for countries that have stuff other countries need, and industries shutting down because that stuff became too expensive there.

On the other hand, we did print A LOT of money in the last few years, and blaming everyone else except (also) the ones who have the power to print is just stupid.

The fact that labor costs (which are part of a company's profit calculation) are considered a separate "driver" makes this even more confusing.

You say that prices go up because they can, and that's not wrong, but historically there were other providers also competing. It feels like there has been massive consolidation across industries, and that this centralization has created uncompetitive markets, where consumers don't have any option but to accept a providers price & profit increase.

That feels like the new thing, the new trouble: only the very large are left. Competition does not renew: even if there are fat profit margins waiting to be had, the risk of trying to start a new competitor is too high, too likely to get crushed, has too many personal risks (trying to provide healthcare for your family, not go bankrupt, etc).

The markets have ossified into a state where this ruin you speak is possible.

But that doesn't mean that we can't hate the game.

Capital-isms and market competition are two very different things.

Currently we have A LOT of capitalism AND very uncompetitive markets.

What we need are competitive markets, and the -isms hawked by the multi-generational holders of Capital be damned. (Which, these days, put far less stress on competition than they typically did in the late 20th century. See: Venture Capital-ists clamoring for regulation in greenfield markets, on the explicit basis that too much competition is dangerous!)

What does this look like? Primarily:

1. Stronger anti-trust laws,

2. more anti-trust enforcement,

3. assurance that labor markets are efficient,

4. lowering the barriers to entry for new competition, and

5. substantially shifting the tax burden in the meantime.

In order to change some thing you have to prove that it’s happening.

In the case of “What underlying structure creates society’s problems,” increasingly more research is pointing to inequality itself and lack of democratic participation/ownership in the economy. These are the foundational factors driving poverty and precarious economic conditions for an increasing proportion of the population.

The Lions share of corporate profits go to existing shareholders and only rarely employees, and even rarer do employees compose the majority of shareholders (you have no shareholder power as a FAANG employee different than any other retail investor - namely, none)

So no it’s not irrelevant. It’s very relevant if people want to actually have power in determining how the organizations they join are operated.

You spend the rest of the degree learning history & how to model when you don't have the simplifying assumptions

Economic power, and therefore political power, is concentrating in fewer and fewer hands which allows them to exercise force over competition rather than to compete with competition.

Competition is the back pressure on "greedflation" which is a name that implies greed (which is good in capitalism) is the root cause of increasing prices rather than lack of competition (regulatory capture/citizens united).

It boils down to consumer/labor power.

Labor power represents the ability to make companies compete through regulation or to put the profit these companies reap into labors pockets instead of owners pockets, which is not just a shift of economic power, but of political power. Wages have nothing to do with your labor and everything to do with your market power. Companies collude behind the scene to suppress wages: https://news.ycombinator.com/item?id=29834753 There are companies that sell "market data" which tells companies how much labor should cost.

Unions are the answer to oligopolies and oligarchy. Unions are what you can do, not what somebody else needs to do, or what the government needs to do. Unions are a vehicle of force. Unions are like the 2nd amendment. You can use both to fight tyranny, and in the process put yourself at risk. Trying to make the powerful less powerful requires risk because the powerful will use their power to keep their power.

These oligopolists (https://en.wikipedia.org/wiki/Oligopoly) are exercising tacit "collective bargaining" but people who earn money in proportion to time seem unable to do their own collective bargaining.

Until there is back pressure on corruption, which requires exercises of power against the corrupt, we can expect things to get worse and worse and those with power to be able to leverage the rules of society to grant themselves more power.

The idea that discussing widening margins is "irrelevant" because companies adjust prices based on consumers' price sensitivity seems exactly backwards to me: the fact that profits are so high indicates that consumers have been overly-credulous and ought to be more price sensitive. And zooming out, the accelerated transfer of wealth from consumers to shareholders happens because we consumers collectively allow it. Reporting which highlights the rising profits relative to other factors can be part of what enables a course-correction.

I used to be the conference directory for a college club sport (specifically, paintball).

Part of my job was to find paintball fields to host college events. It's important at to say that the organization that funded these events was 501(c)(3) aka "non-profit" and we therefore were trying to minimize costs.

Something we ran into was this scenario:

- Fields knew we were college focused and a non-profit

- They would generally, out of the goodness of their hearts, charge us at cost or even below cost for our events

- This would sometimes mean turning away hosting events or players with better margin. You could argue that the fields received great free advertising by hosting events so it wasn't a net loss for them.

- That being said, we sometimes saw events coming back the next year saying "it wasn't worth it to host your event"

- This was a problem given that there were only limited fields AND I had a full time job at the time so, ideally, we would use the same field every year

- I would therefore add 10% to whatever cost the fields proposed to us as a "tip"/"return fee" to make sure they were happy

Now, you could argue that my job was to make sure that we always received the lowest possible price given our constraints on field safety, size and location.

I would argue that was ignoring the long term cost to the organization (and my time) to having to keep finding fields that would host us if we tried to minimize cost.

I mention this b/c companies maxing out profit to whatever the customer can bear feels like an excellent short term strategy. If by doing so, they drive customers into debt and then bankruptcy etc, this seems like a net loss to everyone on the longer timescale.

To finalize and maybe clarify: these discussion always seem to end up in a "well, companies maximize profits!" while ignoring the negative long term implications of that strategy.

It’s like companies shifting the burden of their plastic waste onto consumers by telling them to recycle rather than providing a better, less polluting product.

that’s true for essential goods as well, something would have happened to those people that couldn't pay but they do have money and can still pay

that’s the other half of inflation

Only works because dealerships have a monopoly over local sales (i.e. not a free market). Otherwise everyone would be buying their car online without the markup.

Many of those companies will be producing superior products, niche products vital for a small market or are simply more focused on delivering value rather than leeching profit.

The surviving companies in a rough market turn never seem to be the ‘best’ companies.

No, upstream price increases are included as a part of their increased expenses. Any increase in profits is on top of this.

The way you can tell this is true is price any car or truck in the US for sale from dealer X. Then attempt to shop around for a better price from set of dealers Y-Z. You will find that within a convenient-to-you radius the same regional dealership operating co owns all of the dealerships for your preferred make/model.

Then if you expand your search radius you will find that opco is owed by a larger holdco, which "oversees" supply and demand so your price. Not a free market. And not the manufacturers' doing, or their input suppliers, or inflation. It's a gov policy choice as abused by nearly a century of lobbying which some might call bribes.

As I recall the other US industries with explicit antitrust exemptions are Major League Baseball... and domestic shipbuilding vis-a-vis domestic maritime commerce. This is famously why the Love Boat *had* to go to Mexico, because it was (presumably) foreign flagged and couldn't move between US poets without calling at a foreign port.

We have no model of how a pandemic is going to "correlate" economic markets typically under competition.

I think it's highly likely that "supra-economic" shocks of the kind we've experienced have handed a strange unexpected market power that the usual (free market) suspects have yet to parse.

No markets are efficient. While it's probably a bad idea to worship at the altar of profit: A profit of zero for most productive pursuits is not ideal.

https://www.imf.org/en/Publications/WP/Issues/2023/06/23/Eur...

or more innovative companies captured the market share of less innovative ones, e.g. lockdowns bankrupting brick and mortars in favor of online giants

Personally I also believe that the pandemic only accelerated this, as smaller players were disproportionately disadvantaged in many key markets where economies of scale dominate.

Marginal profits are, not absolute profits..

If wages are going down or stagnating, that is an indicator of loss of labor market power and loss of labor power in general.

It's also important to understand that some people earn in proportion to what they own/their capital, while others earn in proportion to their time.

Profit is an aggregate that adds the remuneration of capital (closely related to savings), risk-taking, technological development, initiative (close to efficiency), all kinds of corruption and coercion, and a lot of other things.

We have no viable way to run through a market and classify "well this company is profitable because it's innovative; this other one is profitable because a law requires that everybody buys something it makes", so we can only speculate on what is important at each time.

All that because I'm not sure I agree. I see all kinds of rent seeking and artificial barriers linked to the current environment, and those are not exactly measures of inefficiency, they are something else.

You took that a step too far and started mixing up what inefficiency means. Apple, for instance, has record breaking profits. In general, profits increase year over year such that every year is a record breaker.

Large profits does show an opportunity in a market for another player to come in and produce the same goods/services at a better price. If they are unable to produce it, we should be look into what's causing competition from appearing. Is it a natural resource? Is it regulator capture? Is it labor shortage?

There is going to be some cause for the mismatch, the question is, what is that cause?

It is intuitive that, as soon as enterprising individuals catch wind of high profits being made somewhere, there will be an inrush of competitors looking to seize their share, which then continues until until some type of equilibrium is reached.

The fundamental breakdown in this type of efficient market mechanism is that it requires a reasonably level playing field: referees and rules. Complex systems without adequate regulation may result in local optima one or a few participants, who achieve regulatory capture, externalize costs, or achieve monopoly, oligopoly, or similar advantage to the disadvantage of all others. Regulation is required to achieve the global optimum for the wider group (i.e. society).

Cancer is an a example of a biological system exhibiting high growth with broken mechanisms of regulation. Similar outcomes can be observed when there is a disruption to a predator population, leading to an explosion of prey species, resulting in an ecosystem that is overrun and exhausted until balance returns.

Easier said than done, obviously. But maybe we should try to make it easier?

I can imagine a downward spiral of government regulation creating moats for companies that take advantage of the lack of competition, leading to ever more government interventions that further entrench the status quo.

That job goes to legislators and even then, they don't always have clear options. Windfall profits tax is a start, but what they do with the profits they collect is another. No one likes price controls, but taking short-term action or maybe enacting price stabilization could be very effective. And, of course, all legislation becomes a political minefield where vocal contingencies will simply disavow empirical evidence in favor of pushing an agenda.

I'd also caution against laying too much at the feet of "corporations". Absolutely anybody selling anything on the open market will be doing the same thing. Most homes are sold peer to peer and home prices are inflating like crazy. I wouldn't expect any rational home owner to sell their house for less than the maximum price they could extract because they think buyers deserve a break.

That said, what you are saying isn't entirely untrue, and in fact is considered conventional wisdom by many. If everyone was a lot more price sensitive and more willing to forego discretionary spending, then yes, profit margins and prices would probably be lower. When boomers talk about millennials and their avo toast, this is what they are talking about.

You are trying to exercise individual market power, when there are other "scabs" who will go and spend that money keeping prices inflated anyway.

Your action alone will not produce any value, it requires collusion with other market participants.

If you want to make a change you need to exercise power and that means unionizing.

Not from the Netherlands, but the labor shortage I see Austria is mostly companies still trying to pay 2020 wages rather than a lack of people motivated toi switch jobs/immigrate.

Labor shortage here is just propaganda for "we can't find people willing to work at the salaries we want to pay". In similar fashion I have a constant Ferrari shortage because I can't seem to find these cars at the prices I'm wiling to pay.

Companies and humans operate on incentives. The one to blame is the ones who control those incentives.

Those corporate profits wouldn't be causing the inflation.

They would potentially be the place where they are first noticeable and measurable according to certain measurements, but in a complex system that you do not have instrumented up completely, the first place you see a particular thing appear is not necessarily its origin point. Anyone debugging distributed systems should have direct experience with that.

This is not what is happening, but I kind of this kind of boundary analysis where you stick large numbers in to a system like a helpful way to feel out the landscape of a problem like this.

I'm open to the idea that this or that corporate action is making things better or worse. But "inflation is bad because corporations discovered greed in 2020" is such an obvious falsehood that it calls into question why anyone is even pushing it as a reason. Greed was invented somewhere around the time the first cell divided into a second cell, not several years ago.

Look at the last 4 times inflation yas gone through the roof - every time it was a supply shock, a trafe embargo or a war.

Have a look at this: https://www.economist.com/finance-and-economics/2020/02/13/t...

During the start of the pandemic, there were legitimate supply chain shortages that resulted that resulted in increased prices without increased profits.

Supply chain issues are mostly fixed, but companies road that public perception for a long time to justify price increases.

Inflation doesn't actually change anything about this so if companies can just collude and make up prices the question is why did they only start doing it three years ago

To me this highlights more companies realizing they have pricing power similar to monopoly power or cartel power. A company that has lots of competition can't raise its profit margins. But a company with a moat, where no competitors are able to fund the capital needed to compete, can raise profits.

There's also a question of why high margins don't induce new entrants to these markets, or why consumers responding too cleanly to higher prices by buying less. There's been a variety of factors at play and I think if you want to pin it on profits you gotta put in the legwork to rule out or at least quantify the dozens of other factors.

And like, if Nintendo wants to charge an extra ten dollars for Zelda[1], I don't think thats any kind of call for EU/UK regulators to step in.

[1]: https://www.gamesradar.com/zelda-tears-of-the-kingdom-is-get...

It seems obvious to me that if companies could have raised prices more previously they would have. Therefore companies pushing price is just a proximate cause of inflation, not a root cause.

Many people mention corporate profits drive inflation like that's the end of the conversation. It's the equivalent of saying your house got flooded because the door broke open (allowing the raging hurricane outside to get in). It's pointing at a barely relevant proximal cause to ignore the real issue (the raging hurricane).

The economy is a system of individual actors. Everyone is constantly trying to raise their price (employees and employers included). When you do the equivalent of doubling the money supply in under a year, combined with covid supply chain issues, you create an environment where actors in the economy are able to dramatically increase their prices - often out of necessity because their competitors and suppliers are doing the same. The consequence is inflation. This happens if and only if you dump massive amounts of money into the economy above and beyond what can be absorbed by the rate of production.

In a sense, both are technically true: inflation is because Biden among other world leaders flooded the economy with money, and the economy aka the system of individual actors reacted to this and found they were able to raise prices because the economy could sustain that. The difference is that one of these is a massive unforced error with easily foreseen consequences that caused significant suffering, and the other is human nature (wrapped up in a prisoner's dilemma).

The blame is still rightfully entirely on people like Biden who greenlit this objectively terrible policy.

Talking about supply without velocity is not very useful I don't think.

Supply side issues will show up as profit margins, by your explanation, not necessarily as greater total profits.

you mean, you raise the prices to the point where you maximize profits by taking advantage of the shortage to extract maximal value from consumers. In other words, the exact greedflation we're talking about.

"hammers are on the shelf" is an arbitrary threshold that need not be met: supplying 50 consumers with hammers can be done with no price or marginal profit increase at all

if the analogy is to fit reality, you then raise the price even more (since profit isn't necessarily maximized when demand=supply), blaming the further increase on those pesky supply chain issues, while pocketing the extra money

> Any my revenue is down

actually, it's up, along with profits. That's how bad the greedflation is, and how little the supply chain issues actually impact either

profit-maximizing sellers can only increase prices if demand rises, otherwise they will sell fewer units at the higher price (and if they could've made more money selling fewer units at a higher price then we can assume that they were already doing that because they are profit maximizing)

the only way that demand can rise (allowing prices to rise) in unison is if there is more money going around, which is what happens when the money printer goes brr, which it did https://fred.stlouisfed.org/series/M1SL

In the EU, these statistics aren't recorded so it is very hard to say whether this is correct or why. This paper is built from the very top-level of stats, I don't see any problem with the theory (decomposing the GDP deflator into components) but the lack of granularity with the data is problematic imo, particularly when you are looking at explanations.

In particular, as the paper acknowledges, previous periods showed that firms increased their profit share because they expected future wage increases. This is one of the problems with the data in that there is lags and leads, granular data allows you to more precise about why this is happening.

Also, equating the GDP deflator with actual profitability seems extremely unsound to me. In aggregate, fine. But the paper is talking about profit share not actual profitability. So profits can actually fall, and this method can show they are increasing...that is possible.

Either way, this paper isn't particularly useful and, as the authors well know, everyone will read what they want into this. It is known that the EU has poor competition, it is known that wage growth is probably the most important component of inflation...there isn't really anything particularly new here.

Even if all businesses were cash-flow-positive during Covid, the environment is still more unstable.

/s in case someone thought I was serious?

Isn’t that how inflation works?

Because decreases in effective tax rates account for –10% of the observed change. Including negative contributions is a little confusing, but it gets a lot more confusing when you omit that part without clarifying why.

I found the 2nd half of the article more interesting than the first (2nd half is about employee wages)

It’s worth a full read IMO

The only reason rent isn't currently going through the roof was that corporate fad of buying up every property under the sun for nice reliable income.

crickets huh

I get that corporations are evil and greedy, but inflation is not something corporations have influence over. If anything, we should be looking at banks, yet even banks count on the central bank to print them fresh bills.

And even if you were to blame companies for raising prices, the only reason they had the opportunity to do it was because of excessive monetary policy which started the inflationary spiral.

You do it again and again. Now, it's part of your "process". Let's call it Quantitative Easing. Let's also take advantage of a pandemic to print as much as we can. There is a good "reason" for that.

At some point the music stops and the system collapses. There is no conspiracy there.

They can raise or decrease the interest rates as its governing body sees fit.

To raise taxes or pay debt requires approval from the Legislature and that seems hard to come by.

Additionally there is actually a shortage of USD collateral in financial markets, further reduction of which would have significant consequences.

Rock, meet hard place.

Basically fewer people bought cars, then lots more people bought cars and meanwhile there was a shortage of chips.

[1] https://www.wispolitics.com/wp-content/uploads/2021/08/State... (PDF)

[2] https://en.wikipedia.org/wiki/Certificate_of_need?useskin=mo...

These statements about inflation drivers are surprising (to some) and highly relevant because they counter corporate and conservative propaganda.

We now know that government assistance isn't the main villain in the brutal inflation spikes of the last few years, and we need voters to understand that too.