Even if the cost of raw materials remains high, the rise in prices was indeed partly fueled by the increase in corporate margins at the end of 2022, after a drop in 2021.
What if the rise in prices, observed by consumers when they go shopping, were in fact caused by the companies themselves, which would refuse to cut back on their margins, or even increase them, in order to continue to make profits? This is the thesis defended by deputies of La France insoumise. “We are experiencing inflation created by the maintenance of profits in very large companies”, assured Eric Coquerelon April 5, in the Finance Committee of the National Assembly. “In the last quarter of 2022, the increase in corporate profits is responsible for 60% of inflation”, encrypted on his side Adrien QuatennensApril 11, in the hemicycle. “Supermarket price hikes are boosted by profits from the agri-food industry”, also pointed Farida Amranielected in Essonne, the same day at the same place. “The profits of the sector have doubled from 3 to 6 billion.” Do the rebellious elected officials say true or fake? Are corporate margins responsible for the current inflation?
A “price-profit” loop phenomenon
This specter of rising prices caused by the increase in corporate margins was also raised by Christine Lagarde, President of the European Central Bank (ECB). “A lot of companies have been able to increase their margins in sectors that have suffered from the supply restrictions and the resurgence of demand”, she lamented on March 16 during a press conference on the reasons for inflation. The phenomenon is referred to by economists as a “price-profit loop”.
But what about France? To support their remarks, the deputies of La France insoumise put forward a note published on April 11 by theLa Boétie Institute, a think tank responsible in particular for training rebellious militants. The study thus asserts that “The rise in prices is driven by rising profits, particularly in sectors related to energy, international freight and in the agri-food industry”. And to continue: in the fourth quarter of 2022, “this increase in corporate profits is responsible for 60% of inflation compared to the previous quarter, against only 30% for wages and 10% for the cost of intermediate purchases”.
To illustrate this increase in corporate profits, the Institut La Boétie also underlines the sharp increase in the margin rate, ie the share of the profit that goes to companies once they have paid their employees and covered their production costs. The agri-food sector would thus have seen its margin rate “fly away” from 30% in the first quarter of 2021 to just under 44% in the fourth quarter of 2022, according to a chart in the note. Resulting in a doubling of profits in the sector, “going from 3 to 6 billion” euros between the fourth quarters of 2021 and 2022.
An increase also linked to raw materials
For its study, the La Boétie Institute states that it relied on a note from INSEE published on March 15 on inflation and corporate results. However, its authors are less assertive than the rebellious elected officials on the causes of the rise in prices. “Even though prices have generally fallen, inflation still reflects past increases in the cost of inputs [les matières premières]“noted Julien Pouget, head of the business cycle department at INSEE and one of the authors of the study.
For products from the agri-food industries, the cost of raw materials represented, according to calculations made by franceinfo based on INSEE statistics, another 54% of the rise in production prices in the fourth quarter of 2022. “In the agri-food sector, there is always a lag effect. Manufacturers buy their raw materials several months in advance through futures contracts. They must first sell off their stocks previously purchased at a high price in the previous months. before they can lower their final prices”explains economist Anne-Sophie Alsif.
The fact remains that the increase in profits has indeed been a factor of inflation in 2022.
“There has indeed been a contribution from the margins of agri-food companies to the increase in production prices and therefore to inflation.”
Julien Pouget, economist at INSEEat franceinfo
According to calculations by franceinfo, the increase in gross operating surplus (EBITDA), i.e. the company’s margin, has for example contributed to 41% of the rise in production prices for agri-food industries in the fourth quarter of 2022. For non-agricultural products, margins explain around 61% of producer price inflation in the same quarter. This corroborates the orders of magnitude indicated in the study by the Institut La Boétie.
An increase after a decrease
However, warns Julien Pouget, to correctly assess the impact of corporate margins on inflation, we must take into account what happened in previous years. “In 2021, companies have rather compressed their margins to reduce the effect of the increase in the cost of raw materials”recalls the statistician. “The margin rate in the food industry has thus fallen throughout 2021 and was still at the beginning of 2022 below its pre-crisis level. This has mitigated inflation and its shock to consumers. “emphasizes the INSEE expert.
“It was only recently, in the second half of 2022, that the margin rate reached a higher level [par rapport à la moyenne de l’année 2018]“continues the INSEE economist.
“It thus seems that a catch-up phenomenon took place at the end of 2022.”
Julien Pouget, economist at INSEEat franceinfo
So, “factually”, confirms Julien Pouget, margins in the agri-food industry were, between the second quarter of 2021 and the first quarter of 2022, lower than their average level for 2018. If, according to INSEE statistics, profits in the agricultural sector are well increased from 3 to 6 billion euros between the fourth quarters of 2021 and 2022, as claimed by the elected representatives of La France insoumise, this margin in the fourth quarter of 2021 was lower by 1.2 billion euros compared to the first quarter of 2018 ( 4.2 billion).
“It is true that there is a catch-up”concedes statistician Sylvain Billet, author of the study published by the Institut La Boétie, interviewed by Marianne. “But we see more than a catch-up effect, margin rates are higher than before the crisis.” The margin rate of the agri-food industries was indeed, in the fourth quarter of 2022, 5.8 points higher than the level of 2018, assesses INSEE. “It is difficult at this stage to determine whether companies have increased their margins beyond a catch-up effect, as recent years have been very turbulent from an economic point of view.warns Julien Pouget, however. The point of vigilance is to know if this increase in margins will be confined to a catch-up effect or if a more inflationary process is being initiated.e.”