WHILE INFLATION IS PRIMARILY BEING DRIVEN by global factors, a new report argues that surging profits made by some companies could be a contributing factor to rapidly rising prices.

Contrary to the arguments of the Prime Minister and the Governor of the Bank of England that wage restraint is needed to keep inflation down, the think tanks argue that profit restraint is also required.

The joint report by the Institute of Public Policy Research (IPPR) and Common Wealth warns that the surging inflation rate is creating ‘winners and losers’ with many people and businesses seeing their weekly budgets and profits squeezed by high prices, while some companies are seeing windfall profits.

New analysis shows that the profits of the largest non-financial companies were up 34 per cent at the end of 2021 compared to pre pandemic levels – rising significantly faster than inflation and wage growth.

The analysis shows that this increase is being driven by a small number of companies, with 90 per cent of increases in profits accounted for by only 25 companies. The Basic Materials sector (which includes mining) saw the strongest increase, with net profits up by £37 billion between pre-pandemic levels and end-2021. Moreover, in six out of nine sectors, profit margins had been stable or increasing despite inflation pressures by end 2021.

The report argues that some firms could have considerable market power with very few competitors, and this could be making the cost of living crisis worse by raising prices beyond what would be economically justified. The report notes that there is a high degree of market concentration in some industries with high turnover, with five firms accounting for about 60 per cent of turnover in the booming mining and quarrying sector.

The report calls on policy makers to consider measures to increase competition in these sectors to help bring down prices. As well as regulation to prevent artificially inflated prices in the future, the think tanks also suggest excess profits taxes could be considered to redistribute increases in profits which are the result of market power.

The report argues that OECD member states should consider a global windfall tax on commodity profits, with the proceeds used to incentivise investment in global supply chains and provide more support to households hit by the cost of living crisis. Such a tax could raise £10 billion from UK listed companies alone, according to the report.

Carsten Jung, IPPR Senior Economist and former Bank of England economist, said: “A lot of attention has been given to wages as a potential driver for inflation, but so far wage earners have been losing out while many firms’ profit margins have increased. Looking closely at how profits are changing should be considered part of the toolkit of keeping inflation anchored.”

Chris Hayes, Common Wealth senior data analyst, said: “Excess profits and windfall taxes can be important for addressing market outcomes that are due to market power and extreme market movements. Pursuing these through global coordination could ensure that global markets run efficiently.”

* Read Prices and Profits after the pandemic here.

* Sources: Institute of Public Policy Research and Common Wealth