According to an IFO study, many companies use inflation to make a profit. They’re raising their prices without really needing it. However, the institute rejects market interventions by the state – instead there is a counter-proposal.
Consumers are still struggling with high inflation. Everyday products are more expensive, consumer spending is increasing. Contrary to previous assumptions, however, supply bottlenecks and the energy crisis should not be the only cost drivers. According to a study by the Institute for Economic Research (IFO), many companies use inflation to increase their profits.
“This applies above all to trade, agriculture and construction,” said the deputy head of the IFO Dresden branch, Joachim Ragnitz. This is based on data from the official statistics for economic performance. From this, the IFO experts determined differences between nominal and price-adjusted value added. In order to calculate the nominal value added, all current market prices of the goods that were produced for the end consumer in a certain period are summed up. In the case of price-adjusted value added, price changes are eliminated by using the prices of a base year.
In this way, the IFO was able to draw conclusions 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.” Basically, consumer spending in 2021 fell sharply compared to the previous year, which was related to corona-related restrictions. After the end of many measures, demand increased again, which boosted the slowed-down economy.
According to the IFO, billions in relief from the government should 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, fueled by material and personnel shortages.
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. However, Ragnitz leaves it unclear whether the price increases will affect all product classes, from cheap to expensive. Instead, he emphasizes that government intervention in prices is not necessary.
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. In some EU countries, however, such a tax is already applied, for example in Italy. This is calculated on profits or sales that are far beyond those of a specified period (e.g. the previous year). Mainly affected are energy companies, which benefited greatly from this year’s chaos in demand.
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. A controversial measure, since according to experts it is usually difficult to implement bureaucratically. Requirement calculations could take so much time, as the economist Maurice Höfgen explained in his blog.
