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

Soaring UK inflation shouldn’t be the consequence of increased firm revenue margins, even for meals costs, a former Bank of England curiosity rate setter has stated, echoing related findings by present members of the Monetary Policy Committee.

Michael Saunders, senior financial adviser at consultancy Oxford Economics, stated on Monday that “greedflation”, the place companies drive up inflation by rising costs past the extent that their very own worth pressures would demand, didn’t “reflect the reality for the UK”.

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

A quantity of central banks have warned that “greedflation” dangers entrenching worth pressures. Profit margins of US corporations hit their highest degree for the reason that aftermath of the second world battle in 2022, based on a study by the University of Massachusetts Amherst.

Eurozone companies have additionally loved a pointy enlargement in their profitability over the previous two years, analysis by French financial institution Natixis discovered.

Saunders’ feedback echo remarks by Ben Broadbent, BoE deputy governor, who final week stated there had been “no increase in the profit share of national income” in the UK, following issues over grocery store “profiteering”.

Speaking in the identical session, which got here after the central financial institution raised rates of interest by 1 / 4 of a share level to 4.5 per cent, BoE governor Andrew Bailey stated that in phrases of combination company income, the figures for the eurozone and the UK didn’t “tell the same story”.

Saunders famous that whereas power corporations’ revenue margins had risen considerably, the mixture income of non-financial teams, excluding oil and fuel, had fallen in the 12 months to the third quarter of 2022 and had been near the lows of the previous 25 years as a share of gross home 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 confirmed that the profitability of UK companies, excluding oil and fuel producers, fell in the 12 months to Q3 2022, hitting one of its lowest-ever ranges.

Saunders stated meals inflation — which reached a 45-year excessive of 19.2 per cent in March — was largely the consequence of enter costs rising by almost 30 per cent for UK meals producers and the prices of importing meals rising by greater than 40 per cent.

He added that the present fall in agricultural commodity costs had but to indicate up in shopper meals inflation as a result of of “the usual lags rather than profiteering”.

Saunders stated excessive inflation denting company income had implications for financial coverage, as a result of it decreased the necessity for rate will increase.

If excessive inflation is producing a squeeze on income 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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