ECB confronts a cold reality: companies are cashing in on inflation


Frankfurt, March 5 (BNA): Policymakers at the European Central Bank last week faced some hard truths: Businesses benefit from rising inflation while workers and consumers foot the bill.

Reuters reports that the dominant macroeconomic narrative over the past nine months has been that sharp increases in the prices of everything from energy to food to computer chips have increased costs for businesses in the 20 countries that make up the eurozone.

The European Central Bank (ECB) responded by raising interest rates by the most in four decades to cool demand, arguing that it faced the risk that higher consumer prices would push up wages and create an inflationary spiral.

Three sources who attended the meeting said that at the resort, which was held in the Finnish village of Inari, aimed at giving the bank’s board of directors an opportunity to delve into topics that were only touched upon in regular meetings, a slightly different picture emerged.

The sources told Reuters that the data expressed in more than twenty tranches presented to 26 policy makers showed that the company’s profit margins are increasing rather than contracting, as would be expected when input costs rise sharply.

A spokesperson for the European Central Bank declined to comment for this story. “It’s clear that earnings expansion has played a larger role in the European inflation story in the last six months or so,” said Paul Donovan, chief economist at UBS Global Wealth Management. “The ECB has failed to justify what it is doing in the context of a more profit-focused inflation story.”

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The idea that companies were raising prices more than their costs at the expense of consumers and wage earners is likely to infuriate the public.

But it has ramifications for central bankers, too. Inflation fueled by rising corporate margins tends to self-correct as firms eventually put the brakes on rising prices to avoid losing market share, making taming it a very different beast from a wage-price scramble.

Therefore, a new inflation narrative focused on margins could give the more pessimistic members of the board some ammunition to fight higher prices after their resistance proved largely futile over the past year, according to economists interviewed by Reuters.

The debate is set to resume at the European Central Bank’s next policy meeting on March 16, when the bank promised to raise interest rates to their highest level since the height of the financial crisis in 2008.

The inflationary narrative in the eurozone is slowly beginning to shift. Businesses expect smaller price hikes as the outlook for costs and demand becomes less clear, according to surveys published by the European Central Bank and Germany’s Ifo Institute.

Some European countries such as Greece have introduced measures to curb commodity inflation while France and Spain are discussing similar steps.

“The economics of profitability suggests we may see more earnings pressure,” Philip Lane, chief economist at the European Central Bank, told Reuters. European companies know that if they raise prices too much, they will suffer a loss of market share.

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In the US, profit margin expansion started earlier and has already begun to reverse, albeit slowly and unevenly.

But unlike the US, there is no official corporate margin data for the Eurozone. Instead, national accounts and earnings reports from listed companies are used as proxies to paint a picture of inflation.

Eurozone consumer goods companies, for example, boosted operating margins to an average of 10.7% last year, Refinitiv data showed, a quarter more than in 2019, before the global pandemic and the war in Ukraine.

The 106 companies surveyed ranged from French resort owner Pierre et Vacances to car maker Stellantis to luxury goods group Hermes and northern retailer Stockmann.

Likewise, earnings, rather than labor costs and taxes, have accounted for the lion’s share of domestic price pressures in the eurozone since 2021, according to calculations by the European Central Bank based on Eurostat data.

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