Ifo – companies use inflation to maximize profits

Berlin (Reuters) – According to a study, many companies are taking advantage of high inflation to increase their profits.

According to the study by the Ifo Institute published on Tuesday, higher prices for energy and intermediate consumption alone do not explain the extent of inflation in Germany. “Rather, companies in some sectors of the economy seem to have used the price increases to expand their profits,” said Joachim Ragnitz, deputy head of the Ifo Dresden branch. “This applies above all to trade, agriculture and construction.”

This was suggested by data from the official statistics on economic performance. From this, the Ifo experts determined differences between nominal and price-adjusted value added. This allowed conclusions to be drawn about price increases that were not caused by higher wholesale costs. “After Corona, private households had accumulated large savings,” said Ragnitz. “These were dissolved in 2022 and fueled consumer demand.” The government’s billions in relief may also have helped to support demand and thus expand the scope for price increases.

In particular in agriculture and forestry, including fisheries, as well as in the construction industry and in the retail, hospitality and transport sectors, many companies have increased their prices significantly more than would have been expected based on the increased costs for upstream services alone. “Some companies seem to be using the increase in costs as an excuse to improve their profit situation by increasing their sales prices,” said Ragnitz.

Farms would have used up their stocks of fertilizers and feedstuffs initially, but had already included the expected price increases for repeat orders in their calculations. In construction, imbalances between supply and demand are likely to have contributed to the particularly strong price increases. This is especially true for some metropolitan areas.

Ragnitz said that only more competition would help against excessive price increases. Consumers could also buy cheaper products, dampening earnings inflation. There is no reason for government intervention in prices. Because of its distorting effect on the market’s scarcity signals, an excess profit tax could neither be enforced in line with the market nor with legal certainty. Since there are no indications that the price increases are based on agreements between the companies, antitrust measures are also not helpful. Fighting inflation is primarily a task for the European Central Bank (ECB). The government can help bring down inflation by forgoing broad-based relief in favor of all households and by restricting policies to particularly poor households.

(Report by Rene Wagner, edited by Kerstin Dörr – If you have any questions, please contact our editorial team at [email protected])

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