Who benefits from inflation? Companies that raise prices (and forget to lower them)

From major bankers and unionists who tend to squabble publicly, it’s not often that you hear similar arguments. But when that happens, one has to ask a few questions. Why do Bank of Italy Governor Ignazio Fiesco, Italian ECB Executive Director Fabio Panetta, and CGIL Secretary General all hit the same wrench? They say: if inflation is so high in Europe (and in Italy) also because firms raise their prices as raw materials increase, and then forget to lower them or at least break the cycle of rising prices when the cost of gas or oil or grain or copper has fallen. So in the current inflation there will be an opportunistic element that benefits some producers and affects consumers. maybe?

CGIL position

The CGIL leader told me in the interview that courier Posted Saturday April 15th: 1 thread removed, looks like a tab. Exorbitant profits are being made from the cart, because in recent months production costs have fallen a lot – let’s think of the price of gas – while increases for families continue to rise. And again: since the beginning of this wave of inflation, we have only heard about the danger that contract renewals could lead to a downward spiral in wage prices. What we’ve seen differently: steady wages and growing profits, which aren’t pulling increases now even if companies are producing at much lower costs than they were six months ago.

Notes of Fiesco and Panetta

in his last speeches

Fiesco referred to the importance of the income policy promoted by Carlo Azeglio Ciampi thirty years ago. To get out of one of the many Italian crises (the 1992 crisis), the then Governor of the Bank of Italy Ciampi favored an agreement between companies and trade unions to contain price dynamics. From what I understand, Visco forcefully raised the issue at the ECB’s Governing Council table in Frankfurt. As for Panetta, he also talked about it In a recent interview with The New York TimesLooking at the entire eurozone. The central banker said there was a lot of discussion about wage increases as a factor that could lead to an inflationary spiral. But we may not be paying enough attention to the other component of income, which is earnings, he added. And again: given the economic situation, there may be ideal conditions for companies to increase prices and profits. Panetta continued that it is not for me to judge whether or not that is true, but he noted that input costs are falling, while retail prices and profits are also rising. There is enough for a central bank to worry about rising inflation because of higher profits.

companies that have increased returns

But right? We see. Because if this is true, then perhaps there is something that can be done to mitigate the loss of employees’ purchasing power that has amounted to at least 15% in the past two years: cut the real value of wages and salaries with little historical precedent. There is no doubt that something similar is happening in the eurozone. Panetta explains that prior to the pandemic, companies’ average profit margins were around 7.2% of turnover, but with the post-Covid recovery, they have gone up one step: in the past few months, they have stabilized between 8.5% and 8.7%. Generalized inflation gave the right, above all, to large groups with unique products, to convey higher price increases to customers than they themselves suffered to buy the raw materials they needed (from steel to electricity). For example Porsche, in the midst of the war-related gas crisis in Ukraine, Margin increase on each vehicle sold from 16.9% in the previous year to 19.4% in mid-2022.

In theory, this should not happen in Italy, because many companies earn less and it is easier for consumers to fear that they are more fragile. But look at the chart above. It represents the cost of products when they leave the factory gates, according to the Istat database. It shows that sectors such as the entire food industry (blue line), textiles, chemistry, the production of plastics or building materials such as tiles, glass or above all cement (green line), or even the metal industry or manufacturing of machinery, reacted to the explosion in raw material cost. They started increasing their prices as the increases in natural gas started in early 2021, when prices were still practically the same as they were in 2015. Since then, however, they haven’t stopped. For example, ceramic products rose another 4% in February compared to January. The production and processing of meat, the production and processing of fruits and vegetables, or the manufacture of underwear also recorded a continuous rise in prices in February even after a year and a half of continuous increases. Other product categories stabilized for the first time in February, but after rising at least 25% in the past two years.

Cost increases and raw materials

In essence, we’re still in full inflation. The highs are slowing, but the new higher price levels are at least proven bullish. Italians know that, in their tens of millions, they are struggling to make it to the end of the month. All of the increases have been driven by the companies’ imperative to adjust to rising raw material costs, which rose very quickly until last summer. But the chart above shows, with the example of TTF, that the trends have now reversed. Gas costs industrial companies are 57% less than a year ago, Brent oil is 22% less, electricity is 40% less, copper is 14% less, steel is 23% less and iron ore is 20% less. Energy transition metals prices have also fallen, with listing prices for lithium and cobalt halving or more. Almost all heavy industry inputs have become cheaper over the past year. Same story for basic food chain products: urea (fertilizer) is already up 67% from last year, wheat up 39% and soybeans up 11.5%.

Increases no longer reflect commodity prices

We understand each other: many lists of industrial products have been revised upward to reflect the prices of raw materials that no longer exist, because the latter have shrunk. They’ve been off and on for at least six months, if not more. However, prices at factory gates and those on supermarket shelves have not fallen, in many cases they have not even stopped and continue to grow. Not surprisingly, corporate profits have increased, in some cases. It is no coincidence that Istat writes in its latest Competitiveness Report (on 83 pages) that in the energy, wood, paper, printing, chemistry, machinery and construction industries, the increases in Italy have been more than proportionate to the cost. He increases. I think bridging this gap will take some time. It doesn’t happen overnight. Nor do I think Landini’s proposal – an exceptional tax on profits and oversight by the Ministry of Enterprise – is the right prescription. But don’t even pretend nothing happened.

This article was published in the Corriere della Sera newsletter Whatever It Takes, to subscribe click here.

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