EU Central Bank Shifts Focus to Wage Regulations Amid Corporate Greed Concerns
Europe’s central bankers reportedly met in a remote Finnish village above the Arctic Circle this week. According to a Reuters report, the meeting included a presentation of two dozen slides detailing how large corporate profits made up the bulk of inflation over the past year. This is a departure from the official story until now of a mismatch between demand and supply or “too much money chasing too few goods.” While the presentation has not been made public, it highlights that corporate profits, not wages, are pushing up general inflation.
Over the past nine months, the European Central Bank has engaged in the steepest interest rate hikes in the euro’s history to fix the mismatch between demand and supply. However, it is unclear whether (and how) current monetary policy addresses corporate profiteering. The more significant concern is whether increasing interest rates will reduce corporate profits.
The scale of corporate profits is vast. The margins of US companies in 2022 surpassed a level not seen since 1947. Based on a survey of 106 companies, Eurozone companies boosted profit margins to an average of 10.7 percent in 2022, up 25 percent over 2019. This has led some to argue that post-pandemic price hikes are a form of corporate herd behavior with price increases by “price setters” in the commodity and oil and gas sectors “providing an impulse for further price hikes downstream.”
The EU has seen real wages decline by 2.9 percent in 2022. Real wages in Germany fell by 3.1 percent last year and fell for the third year. The fact that corporate profits, not wages, drive inflation raises the question of how monetary decisions are made. MEPs have often asked this question during their monetary discussions with Lagarde in parliament. While corporate profits were listed as a potential driver of inflation, Lagarde did not mention profits during her most recent press conference, discussing wages 14 times instead.
Key takeaways:
– Corporate profits, not wages, are driving inflation across Europe.
– The scale of corporate profits is significant, with US companies recording profit margins not seen since 1947.
– While corporate profits were listed as a potential driver of inflation, ECB President Christine Lagarde did not mention profits during her most recent press conference.
– It is unclear whether the ECB’s current monetary policy addresses corporate profiteering.
Related facts:
– Over the past nine months, the European Central Bank has engaged in the steepest interest rate hikes in the euro’s history to fix the mismatch between demand and supply.
– On average, Eurozone companies boosted profit margins to 10.7 percent in 2022.
– The EU has seen real wages decline by 2.9 percent in 2022. Real wages in Germany fell by 3.1 percent last year and fell for the third year.
In conclusion, the fact that corporate profits, not wages, are driving inflation raises questions about the ECB’s monetary policy. While past decisions made by the ECB have been arguably ineffective at curbing corporate profiteering, the current interest rate hikes may reduce corporate profits. As the situation evolves, it will be interesting to see how the ECB addresses this issue and whether it changes its monetary policy accordingly.
