“Dear customers, unfortunately we have to raise our prices because everything is becoming more expensive for us too.” Consumers are currently hearing a lot of sayings of this kind. In order to generate understanding for price increases, companies currently often refer to increased energy costs, more expensive raw materials, additional transport costs and the like. The message: We can’t help it either.
In many cases, however, that is not entirely true, according to a study by the ifo Institute. Calculations by the economist Joachim Ragnitz, deputy head of the Ifo branch in Dresden, have shown that higher procurement prices for companies are “not the sole reason for the increased inflation”, i.e. higher consumer prices. “Rather, some companies seem to be using the increase in costs as an excuse to improve their profit situation by raising their sales prices even more,” writes Ragnitz in his essay “Profit Inflation and Inflation Winners”.
In other words: Some companies are taking advantage of the current general inflationary trend in order to raise prices more than they should in the slipstream – and thus increase their own profits. According to Ragnitz, official data for the first half of 2022 showed that the economy as a whole was even able to increase its profits slightly compared to the previous year despite the crisis.
But who are the inflation winners? To find out, the economist compared the development of nominal and price-adjusted value added by sector. From the difference he draws conclusions about price increases that are not due to higher costs. Three major sectors in particular caught his eye: “Especially in agriculture and forestry, including fishing, as well as in the construction industry and in the retail, hospitality and transport sectors, companies have increased their prices much more than could be expected based on the rise in wholesale prices alone would have been.”
For agriculture, Ragnitz states that many goods have become scarce worldwide as a result of the Ukraine war, so that world market prices have skyrocketed. However, some of the price increases are probably also due to the fact that companies have already factored in rising prices for inputs such as fertilizer and animal feed.
According to the analysis, however, in construction and trade, the world market prices play less of a role than national conditions, so that companies were able to take advantage of the “opportunity of the hour” for significant price increases. The construction companies benefited from the fact that their services were in such high demand that it was difficult for builders to find the providers they needed in a timely manner. Retail, in turn, benefited from the fact that many private households consumed even more after the end of the corona restrictions.
In addition to higher costs for advance services, wage increases can also lead to price increases. According to Ragnitz, however, wages did not rise sharply enough in the period under review to fully explain the price increases. “However, this means that companies have evidently also used inflation to significantly expand their profits.”
In addition, the inflation winners among companies have not only exploited the higher inflation, they are also driving it further with their price increases. “Thus, Germany currently not only has cost inflation, but also quite obviously ‘profit inflation’,” Ragnitz notes.
Nevertheless, the economist considers state intervention in prices to be the wrong means, as long as it is not about illegal price fixing, which is punished by antitrust law. He also expects more harm than good from the introduction of an excess profit tax because it distorts the market and cannot be implemented in accordance with the law. Above all, one thing helps against excessive price increases: more competition, so that the consumer can choose the cheaper offer.
