The FT notes this morning that:
We are all, of course, aware that this is not true for all companies. Equally, it is appropriate to note that many complainers are struggling. On balance the ONS is probably suggesting as a result that, just as is true in the household economy, there is massive redistribution of wealth going on in the corporate sector with major winners and losers emerging but overall income is stagnant.
However prices charged by companies are rising. We know that. If that was not the case there would be no inflation.
Now we know that there is no increase in profit rate.
And we know wages are lagging behind inflation whilst raw material prices are stabilising.
So, given that the number of cost inputs into a corporate income statement are limited in number, what can be causing the increases?
Might it just be interest costs, as I suggested recently?
If, as companies rationally expect given Bank of England commentary, these interest costs are going to keep rising, and most of the UK's largest companies are by far the most leveraged (i.e. they have a greater degree of borrowing than average, and so borrowing cost), are they pricing that interest rate rise into their product pricing to maintain profits, and as a result is it possible that the Bank of England itself might now be the biggest driver of inflation in the UK? I think so.
The Bank will dismiss this, saying that in competitive markets companies could not pass this interest rate cost on to consumers. That is what their theories say. But their theories ignore the fact that most larger companies in the UK, who dominate the price setting agenda, have monopolistic characteristics and so of course they can do this.
I am not saying that my hypothesis is proven. I am saying that it is plausible.
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Clearly historical data showing the percentage increase in outgoings on business borrowing would help consolidate your argument. The CBI would be an obvious agency for collecting such information were it’s management not pre-occupied with other matters!
I think your hypothesis is not just plausible but likely.
There seems to be hysteria about the slightly lower fall in inflation than expected. This is ridiculous. Certainly the BoE should know better. One should not take a single month’s figure on its own, there is too much noise in the signal (which is lagging anyway). The panic seem to have been caused by a small increase in the second differential of prices. The noise in small changes in inflation is huge. Nothing meaningful can be read into this small difference from expected inflation.
And yet the financial markets, or many just the financial scribblers in the main stream media, are in a frenzy. This says much more about the financial markets or the media than the real economy.
Inflation will fall. Rates will fall.
I’m thinking that one of the changes to businesses over the last few decades – which has been mentioned and commented on, but perhaps not stressed as much as it might have been – has been the move from raising investment capital through shares, with return (dividends) at the end of the payment queue, to raising it through bank, etc. loans – whose providers insist on their return (interest) being at the front of the queue.
Which means that interest rate costs are now such a proportion (in size and priority) of overall costs that companies have no way to avoid passing them on.
I recall reading that that Victorian railways were very restricted in how much (if at all) they could borrow (beyond shares of various types), and do wonder whether such restrictions should be placed generally on limited companies.
Remove tax relief on borrowing and the probloem would be solved
Hmm. I recently read Costas Lapavitsas’s pamphlet “The Cost of Living Crsis (and how to get out of it)” in which, in Chapter 5, he firmly places the blame for inflation on the “profits of the 350 biggest companies listed on the London stock exchange”. He cites a report by Unite the Union, /news-events/news/2022/june/new-unite-investigation-exposes-how-corporate-profiteering-is-driving-inflation-not-workers-wages/. I believe that, and would caveat that the ONS figures are for all companies and furthermore for Q4 2022. Unite have further reports in the series that show how the profits of the energy companies and the banks have soared.
I do agree that interest rates are also to blame when most companies are leveraged and seek at least to maintain their margins.
Is a government imposed 9.7% increase in the minimum wage not inflationary in itself?
Why?
If prices have gone up by 10% or more first how can that be inflationary?
What is the balance between oil&gas companies, manufacturing, non-financial services and the rest (e.g. retail etc)?.
The UK has an unbalanced economy, too little mfu (in which capital investments can raise productivity) and perhaps too much service (where productivity is difficult to quantify). We have seen that oil&gas is highly profitable (= unreasonably profitable) – well north of 10%. Thus if you take the aggregate (all sectors, excluding finance) perhaps oil&gas makes the others look good in terms of profitability?
I see Norma Lamont was giving an interview the other day – stuffed full of nonsense as usual – claiming wages drove inflation & yes by golly we need interest rises – interviewer never bothered to question him – pathetic stuff, somewhere an old people’s home is missing its resident idiot. Speaking of idiots:
“The Bank will dismiss this, saying that in competitive markets companies could not pass this interest rate cost on to consumers”.
Let’s try this for size. The UK auctions off-shore wind capacity. Various companies compete on the basis of £/MWh for the right to build a project. Competition is fierce. The £/MWh bid is a function of the levelised cost of electricity, pertaining at the time of construction of the project. Most projects are a blend of debt/equity – typically 80/20. Debt costs are a function of interest rates applicable at the time of the auction (or final investment decision). The companies competing in an auction will face broadly similar interest costs – because these are largely a function of the counterparty buying the electricity – in this case HMG. Off-shore (& hopefully soon onshore) wind are highly competitive markets – at the time of auction. Given the companies face broadly similar financing costs – they will (& do) pass on any rises in financing costs. The Bank of Imbeciles can dismiss reality if it wants – but it is still reality and thus its statement about “competitive markets and no pass through” is demonstrable garbage.
I am not sure we need more manufacturing
I buy your auction analysis
ONS uses gross profit divided by gross capital employed to calculate it’s numbers, which would be roughly independent of interest rates and inflation in the long term, so I don’t think your argument holds.
You could also compare trends in gross profit, EBITDA and net income margin to strip out interest costs as a factor. At a guess I’d say it will be low as large corporates borrow primarily fixed rates and also hedge their interest rate risk to manage their interest costs well ahead.
The more likely reason for declining profits are much more simple. Input costs have increased (materials, energy, wages) and the full increases are not being passed to the consumer.
You can see this in PPI Vs CPI, where PPI (which leads CPI) has been far higher than CPI.
Have you done any of that?
I get plenty of research breaking down the drivers of corporate profits and likewise for inflation.
And I made the suggestion because I already know the answer. Which is that what you are saying has no basis in fact.
Question is, why haven’t you done it? And given you haven’t done it why are you happy to make claims based on your unverified (and totally wrong) assumption?
So, you’re just trolling
I thought as much
Richard just because somebody picks holes in your argument why are they automatically trolling? I thought you would be more interested to get to instead fully understand the drivers of inflation and corporate profits?
Oddly, you had a different name very recently
You are a troll then
How very odd
Hi Richard. I think this is very plausible and worthy of further research. I am sure you are already aware of Blair Fix’s research in this area in the US, but, if not, the most relevant paper is at: https://economicsfromthetopdown.com/2023/02/19/interest-rates-and-inflation-knives-out/
Thanks
It seems that energy, food and financial services are making a bomb and other sectors such as hospitality are struggling or going bust. BOE base rate may go up to 5.5% but then drop later this year with inflation gradually going dowm. In the meantime there is bound to be market fluctuations that don’t necessarily reflect true economic conditions. In 2024 the Tories are bound to produce a pre-election expansionary budget.
MMT orthodoxy tells us we should i
pose tax increases to control inflation. Is this what you would advise??
That is not what it says – because that is far too simplistic
It says we adjust the exchange rate in some cases
It says we select what races to increase in others
And it could also sy we cut tax on those penalised by inflation
To pretend there is a singular answer is wrong
From today’s Bloomberg:
‘Commodity crash signals disinflation is taking hold for now’
‘Cost of everything from metals to crops has plunged this year’
.
.
.
What was the question again? ‘Is the Bank of England the biggest driver of inflation now?’
It sure seems that way!
Since the early 1930’s top economists have argued that the banking system has been a source of economic instability and economic rent. The authorities, probaby under pressure from lobbying and political funding, have looked for every possible alternative to nationalizing money. The 2008 crisis and the Covid crisis, were the closest to admitting we need to get back control of money. Yet the central banks chose to pay interest on reserves. Perhaps CBDCs are the answer to fixing the money system, and to empowering supporters of MMT and economic reform. Today Michael Kumhof explores CBDCs:
Should the state issue its own money?
https://positivapengar.se/webinar-kumhof/?utm_source=Coop&utm_medium=AFJM&utm_campaign=Kumhof2023#lg-kd4de74l
The private banks’ monopoly to create the digital money we use on a daily bases may be challenged in the coming years. Central banks all over the world are investigating if they should issue Central Bank Digital Currencies (CBDCs) in competition with the private banks’ means of payments (bank deposits) and in competition with new private cryptocurrencies trying to gain ascendance. As always when money and power are at stake, this has led to a heated debate between defenders and challengers of the existing banking regime. This debate includes bankers, neoliberal economists, central bankers, independent researchers and activists who are all either trying to salvage or supersede the status quo.
I was told by some expert accountants that with the way the tax is now set a plumber earning £100,00 per year would now have to make around £150,00 per year to maintain the same level of living standards.
That is an unfeasible situation with everyone tightening their belts to try and save where they can. Nobody is going to make 50% more.
I am not against tax rises but I think with a high inflation environment setting taxes how they have done has been pretty difficult and people are only just understanding the continuing need to get as much of that 50% increase in turnover to maintain both the high inflation plus the tax burden to come and try to suffer as little pain as possible for working.
I am sorry – but even thought there are some tax disincentives over £100k, that is total nonsense
Accountants are good at BS on tax and this claim is farcical