No signs of ‘greedflation’ in UK, says ex-Bank of England rate setter

Soaring UK inflation is not the result of higher company profit margins, even for food prices, a former Bank of England interest rate setter has said, echoing similar findings by current members of the Monetary Policy Committee.

Michael Saunders, senior economic adviser at consultancy Oxford Economics, said on Monday that “greedflation”, where businesses drive up inflation by increasing prices beyond the extent that their own price pressures would demand, did not “reflect the reality for the UK”.

Instead, the “overwhelming majority of the rise in inflation reflects cost pressures from energy and other commodities”, noted Saunders, who served on the MPC between 2016 and 2022.

A number of central banks have warned that “greedflation” risks entrenching price pressures. Profit margins of US companies hit their highest level since the aftermath of the second world war in 2022, according to a study by the University of Massachusetts Amherst.

Eurozone businesses have also enjoyed a sharp expansion in their profitability over the past two years, research by French bank Natixis found.

Saunders’ comments echo remarks by Ben Broadbent, BoE deputy governor, who last week said there had been “no increase in the profit share of national income” in the UK, following concerns over supermarket “profiteering”.

Speaking in the same session, which came after the central bank raised interest rates by a quarter of a percentage point to 4.5 per cent, BoE governor Andrew Bailey said that in terms of aggregate corporate profits, the figures for the eurozone and the UK did not “tell the same story”.

Saunders noted that while energy companies’ profit margins had risen significantly, the aggregate profits of non-financial groups, excluding oil and gas, had fallen in the year to the third quarter of 2022 and were close to the lows of the past 25 years as a share of gross domestic product.

“Clearly, the exceptional price rises of a few companies do not reflect the general pattern, with profits of both manufacturing and service sector firms falling as a share of turnover and aggregate GDP,” he wrote.

Data from the Office for National Statistics in February showed that the profitability of UK businesses, excluding oil and gas producers, fell in the year to Q3 2022, hitting one of its lowest-ever levels.

Saunders said food inflation — which reached a 45-year high of 19.2 per cent in March — was largely the result of input prices rising by nearly 30 per cent for UK food manufacturers and the costs of importing food increasing by more than 40 per cent.

He added that the current fall in agricultural commodity prices had yet to show up in consumer food inflation because of “the usual lags rather than profiteering”.

Saunders said high inflation denting corporate profits had implications for monetary policy, because it reduced the need for rate increases.

If high inflation is generating a squeeze on profits and wages, the “weakness in activity is likely to be greater and more prolonged than in a case of buoyant profits, thereby creating disinflationary pressures that will help bring inflation substantially lower”.

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