UK corporate profitability remains stable despite ‘greedflation’ claims

Official data shows that the profitability of UK non-financial private companies has remained unchanged in the first quarter 2023. This suggests that higher corporate profit margins do not push up inflation.

The Office for National Statistics reported on Thursday that companies had a net return rate of 9.9 percent in the three-month period ending in March. This is lower than the 9.8 percent rate in the last quarter of 2022, and also lower than before the pandemic.

This figure confirms the belief of the Bank of England’s policymakers that “greedflation,” whereby businesses increase prices above what their own pressures on price would require, is not to blame for inflation. stands at 6.8 percent .

In its August monetary report the central bank stated that the latest evidence indicated “that firms raising prices to increase their margins are not currently a major contributor to inflation”.

The report stated that “the majority of the price increase has been caused by increases in labour costs”, while “the contribution made by corporate profits only increased slightly over 2023”. The bank concluded that the trend is consistent with data based on self-reported profit margins.

Jonathan Haskel said in May that he “reads official UK inflation data as indicating that the contribution to recent inflation of increasing business profits is small” (). Other economists have a similar interpretation of the data. Ruth Gregory, the deputy chief UK economist for Capital Economics, stated that the data on Thursday showed that companies had “maintained their margins despite rising input costs and weak economic growth”.

She said: “Crucially though, this doesn’t support the claim that companies have increased margins and have thereby fueled inflation.”

While inflation continues to decline from the 40-year high reached in October of last year (11.1%), 6.8 % is still three times higher than the BoE’s target of 2 %. The food inflation rate also fell last month, but it remained at 14.8%.

The UK government considered introducing voluntary price limits after the sharp rises in grocery prices earlier this year. Meanwhile, the competition watchdog warned retailers against profiteering.

The data released on Thursday showed that wholesale gas and oil prices fell, which led to a net return of 10.2% in the quarter ending March, up from 9.6% in the prior quarter. This figure is still lower than the average for 2014-19 of 11.4%.

The average net profit of UK companies in the North Sea has declined to 5.7% for the second quarter running. This was after the Russian invasion of Ukraine caused a spike in energy prices.

This was 7 percentage points less than the three-month period ending December 2022 and the lowest reading in the past three months.

Both manufacturing and service companies saw their rates of return improve in the first three months compared to the previous three, but they both remained lower than pre-Covid.

Manufacturing’s net return rate was 8.8 percent in the three-month period ending March, compared to a high of 18.1 percent at the end 2017.

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