According to a recent report from the Bank of Canada, company profits are not the cause of the high inflation experienced by Canadians over the past two years. The report reveals that changes in corporate markups have had a limited impact on inflation, with overall inflation falling to 2.8% last month. However, core inflation remains relatively stable.
The grocery sector, in particular, continues to experience high inflation, with prices rising 9.1% annually in June. Some politicians have accused major grocery chains of “greedflation,” calling for an “excess profits tax” on these corporations. However, grocery CEOs have defended their profitability, attributing rising costs to suppliers and the global market.
The Bank of Canada researchers found that changes in markups did not coincide with the high inflation rates in 2021 and 2022. Instead, they suggest that the contribution of changes in markups to inflation was limited. The researchers compared company markups with inflation data from 2018 to 2022 and found that markup growth was highest in the manufacturing sector and lowest in the agriculture sector. They explain that changes in prices can be attributed to changes in businesses’ costs and markups, but both may be passed on to consumers and result in inflation.
While markup growth increased during the COVID-19 pandemic, it did not significantly contribute to inflation. The growth in markups was primarily driven by changes in costs rather than businesses using their market power to increase prices. In 2022, when inflation reached its highest levels, markup growth was near zero or negative, indicating that inflation was driven by changes in costs.
In conclusion, the Bank of Canada’s report suggests that company profits are not to blame for high inflation in Canada. Changes in corporate markups have had a limited impact on inflation, and the rise in inflation is primarily driven by changes in costs.
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