I mentioned a couple of days ago that the International Monetary Fund (IMF) has concluded that the biggest contributor to inflation is profiteering by the world's larger companies and that if inflation is to come down then this must stop, with wages being permitted to catch up.
Now there is more opinion to support this view. As the Guardian has noted:
Christine Lagarde says without a shift in corporate behaviour, interest rates will need to stay higher for longer.
They add that she said:
During previous [financial] shocks in the euro area, firms had tended to absorb rising costs in profit margins, as slower growth made consumers less willing to tolerate price hikes. But the special conditions we experienced last year turned this regularity on its head.
The sheer scale of input cost growth made it harder for consumers to judge whether price hikes were caused by higher costs or higher profits, fuelling a faster and stronger pass-through.
At the same time, pent-up demand in reopening sectors, excess savings, expansionary [government] policies and supply restrictions brought on by bottlenecks gave firms more scope to test consumer demand with higher prices.
They then note this:
She said corporate profits accounted for about two-thirds of inflation in 2022 compared with the average over the previous 20 years of one-third.
She suggested:
This in turn led to the shocks feeding into inflation [last year] much more quickly and forcefully than in the past,” she said. To keep inflation low, “we need to ensure that firms absorb rising labour costs in margins.
Without a shift in corporate behaviour, interest rates would need to stay higher for a longer period than previously forecast, Lagarde said.
So, profiteering is to blame and it is this activity within the economy ttat is forcing interest rates up, but very oddly it is those who have already suffered real pay cuts who are being hit the hardest.
But I think the debate over the cause of inflation can now be laid to rest. It is corporate profiteering - and the impact of excessive interest rates is a part of that as banks are a major profit centre within the economy.
But this morning the government minister on the news round is claiming that inflation is caused by public sector wage increases, monetary policy (they are now blaming QE) and supply chain disruption. It's time they stopped the nonsense and started talking about why we still have inflation, and those are not relevant. To claim they are is just misinformation in pursuit of class warfare.
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I think the easy availability of pricing information (retail & wholesale) that can be scooped from the Internet – allows corporates to engage in virtual cartels with impunity
Taking one sector – supermarkets:
https://www.marketscreener.com/quote/stock/TESCO-PLC-4000540/news/UK-supermarket-bosses-reject-profiteering-charge-44202057/
The claim would seem to be that they ain’t (profiteering). Set against that analysts seem quite positive on the sectors prospects (profits?).
The other two sectors making it hand over fist are the oil & gas mafia and to some extent fossil generators. Good to see Ofgem working well.
I’m guessing that profiteering is not homogeneous across all sectors – and perhaps to some extent, we are seeing a replay of the 1970s – when energy price rises fuelled inflation, and, then as now, it was claimed that it was the fault of wages – greedy workers!!
My electricity provider SSEN doubled its profits over the last 12 months despite their generation only using wind.
I can understand prices rising with costs but the equation must be a bit off when profits double.
Mike Parr has addressed this one
Well, there we have it then. It sounds plausible to me.
It’s still stunning to think that this sort economic warfare against paying for labour has been raging for centuries – from the slavery of the cotton fields of the American south to the vegetable fields of East Anglia or any number of old people’s homes in this country, paying a decent wage is just beyond modern capitalism it seems.
You also have to wonder at the regulatory regimes of the ex-public owned services , now privatised services too, – is profiteering catered for in these regulations?
Thatcherite economists just saw privatisation as bringing in more resources. How naive was their faith in markets that led to obscenities like PFI and the rampant profiteering we see now.
It actually points to the need for more public ownership and/or better regulation or state intervention.
Even the ancient Chinese saw how markets could operate as vested interests and cause unhappiness in the people and intervened in the pricing of key commodities in their economies.
The wisdom of markets? The efficient market hypothesis? Not on your nelly. The wisdom is misplaced in something darker, the word ‘efficiency’ relates to enabling greed as quickly as possible – nothing more.
Wakey, wakey people!!
“It actually points to the need for more public ownership and/or better regulation or state intervention.”
I was going to write something else and then I came across this.
“The British government is drawing up contingency plans to bring privately-owned Thames Water, the country’s biggest water company, into temporary state ownership in case it collapses under its debt pile, Sky News reported.”
https://www.reuters.com/world/uk/uk-working-contingency-plan-indebted-thames-water-sky-news-2023-06-28/?rpc=401&
Temporary state ownership! The case for public ownership has never been stronger.
No to another Tory state temporary bailout that benefits a minority. Yes to a basic need being brought back into public ownership. Labour need to wake up and smell the coffee, but I suspect they won’t.
I hate this ‘temporary state ownership’ idea that washes the losses through the state and passes on a company for new exploitation
As you rightly say class warfare is at the heart of the Neoliberal Death Cult that’s been inflicted on the UK for forty odd years. It goes much further back than that though it’s the human failure to recognise that we are the most advanced collective action species and to benefit successfully from this we need to put much greater effort into balancing morality. By this I mean it is a matter of morality to take care of our own individual needs but it’s also a matter too of taking care of the needs of others. This is why there needs to be more plurality of views in British democracy by abandoning FPTP and ensuring we have a less dilettante and distorting mainstream media . Only then do we stand a chance of building a more equitable country including not electing incompetents and crooks to political office.
An obviously correct analysis from the IMF but taking into account that inflation has multiplier effects that cascade throughout the economy one does wonder whether Ms Lagarde’s estimate that corporate profiteering is responsible for only one third of inflation is too small.
It is always interesting to hear of honest views from the other side but I always think that we should be aware of the source, its influences and keep them in perspective.
Rather as if you were a Glasgow Celtic fan and your only source of information was a Glasgow Rangers newspaper. (Or vice-versa)
@Paul Langston – Lagarde is quoted as saying “corporate profits accounted for about *two-thirds* of inflation in 2022”.
I see that Thames Water is on the verge of collapsing. Where has all the money gone?
More on this tomorrow….
Thames Water paid £1.4bn in dividends in 2022. I wonder if they would be in trouble if they hadn’t paid out so much? At least the CEO did not accept a bonus this year, and will have to survive on the £496,000 bonus he received the year before.
If only water companies could find a CEO prepared to accept a salary of just £100,000.
An immensly fair question – where has all the money gone? Without wishing to spoil Richard’s post,
Thames Water is owned by Kemble Water Holdings Ltd, the largest shareholders are Canadian pensions group OMERS (23%), the Universities Superannuation Scheme, (19.7%) BT Pension Scheme (13%), the Abu Dhabi Investment Authority (9.9%), the China Investment Corporation (8.7%) and the Kuwait Investment Authority (8.5%).
Doubtless you will be gratified to know that although Thames is regularly fined for poor performance, its payments keeps some UK pensioners going, as well as a combo of of arabs and the Chinese politburo. The latter two are immensly deserving causes. You can thus console yourself with such positive thoughts whilst watching the occasional tidal wave of turds wash down the … Thames river.
Finishing on a positive note, the two main political parties in the UK, vile-tory and vile&useless Liebore have no plans of any sort to address the above situation. Actually, that’s not fair to Libeore, they have ordered, towels, water and a bowel. Bless.
I will share in the loss via USS
Too many bowels for my liking……
Jeremy Hunt is going to “question the regulators for the energy (Ofgem), water (Ofwat) and telecoms (Ofcom) sectors, along with the Competition and Markets Authority (CMA) and City watchdog the Financial Conduct Authority (FCA)” (Sky News); in an effort to help fix the inflation problem. This means he is implicitly addressing profiteering, if not cartelism; but without any teeth. His policies, however are entirely fixed on an incorrect ‘wage spiral’. What does he expect the regulator to do? If they have not done anything so far in the crisis, and they have generally done far too little to stop profiteering; they should already be history. Regulators in Britain never, ever represent the consumer first. They establish a relationship with the industry that is closer to an advisor than a policeman.
Think about it. A Conservative, neoliberal anarcholibertarian is limply asking for help from regulators. He clearly cannot rely on them ‘doing their job’, because Governments do not set up regulators in Britain to do a job for the consumer; they are there as window dressing for unleashed neoliberal policies.
British regulators, eh? Outside of medicine it is hard to think of a regulator in Britain that has not been abolished for failure, from the FSA down (it is a long list); the failure is always the same: the regulator becomes the creature of the industry it regulates. Meanwhile the public is being – I think the most apt vernacular word is, ‘screwed’.
We are not living in a parallel universe any more, we are living in an absurd parody of the real world.
All these regulators are specifically allowed to let these companies pass on their interest costs….
In Britain regulation is typically designed to fail. Look beyond the list of regulators above; the wanton pursuit of special advantage is deeply embedded in our culture. T
Think Building Regulations, think Grenfell. Not just the immediate visctims, but the prople trapped in buildings, typically as mortgaged homeowners with fire-risk cladding: “There is no way of calculating the overall number of people impacted by the country’s building safety crisis, but there are likely to be more than 600,000 in affected tall buildings and millions more in medium rise towers. A widely cited figure of 56,000 relates to those in high rises with aluminium composite material (ACM) cladding only.” (Inside Housing, June, 2020).
Regulation in the UK is deliberately weak and ineffective; the prisoner of the vested interests, irresonsibel profit seeking, or the Red Top media’s obsession with ‘Red Tape’ (the stupid, facile dismissal of protection against very, very dangerous practices).
Mr Warren, as usual a pertinent post. I agree with your points, with the rider: you failed to acknowledge that UK regulators (Of..etc) have failed for circa 32 years – and counting.
I thought it was unfortunate that you did not recognise such a fine achievement & what is more, delivered under various sorts of “government” (vile-tory-underpants, B.Liar and latterly vile-tory-capstan-full-strength). This shows the overall success of the policy. Groomed UK serfs/peasants, rapacious infrastructure owners and a happy body politic.
On a related note, I was at a meeting yesterday discussing EU electricity market design. For some reason I was invited, the great and the good of industry were there, senior Commission people, a politico from the EuroParl. A friendly discussion was enjoyed by all (until towards the end when, sadly for some, I introduced a series of discordant notes). I am pleased to say that discounting the politico, there were no representatives of EU civil society (thus mirroring similar meetings in the UK). After all, we can’t have Euro serfs involved in things that might affect them. I mention this in passing to show that as in the UK, so in the EU, when discussing important things affecting citizens, the latter must be excluded because otherwise things might change …..and we absolutely cannot have that. dearie me no.
(for citizens of the United States – the above contains irony).
Interest rates rising to “curb corporate behaviour” is devastating for normal businesses and now looks cataclysmic for water companies, train franchise operators and other utilities who could find it less easy to raise prices to service their debts. Thames water could be the first domino teetering precariously…
The Guardian article on Thames Water states the following:-
The chancellor, Jeremy Hunt, met the competition and utilities regulators on Wednesday to discuss cracking down on any companies exploiting rampant inflation by raising prices and water companies’ plans to increase water bills by up to 40% to pay for tackling the sewage and climate crises.
The SAR bailout process was last used in late 2021 when the energy supplier Bulb went bust. The company was handed to a “special administrator” that had access to government funds to keep it running to supply gas and electricity to its 1.7 million household customers. A year later, Bulb was sold to the rival company Octopus Energy.”
https://www.theguardian.com/business/2023/jun/28/contingency-plans-reportedly-being-drawn-up-for-thames-water-collapse
What does the Guardian mean by “government funds”? Does it mean taxes since it repeatedly argues the idiot Thatcherite line the UK state has no money of its own or does it mean more borrowing at Andrew Bailey’s much higher interest rates? Don’t we deserve to know who’s actually paying for the disaster of privatising the water and sewage companies. Is it labour or the shareholders? For once can the Guardian make the effort to explain things clearly to its readership!
Govermment funds are loans from HM Treasury, created like all loans oiut of thin air via the Bank of England in this case