Company profits are not to blame for the high inflation Canadians experienced in the past two years, a Bank of Canada report suggests.
Analysts with the central bank said in a report released Tuesday that data they studied across a number of sectors showed that the contribution of changes in corporate markups to inflation was limited.
After peaking at 8.1 per cent in June 2022, overall inflation fell to 2.8 per cent last month – within the Bank of Canada’s one-to-three per cent target range – but core metrics remain “stickier.” Core inflation refers to the change in the consumer price index, excluding more volatile items such as food and energy.
Canadians also continue to face high inflation at the grocery store – a sector that has come under fire with accusations of “greedflation” from some politicians – with prices rising 9.1 per cent annually in June.
In particular, NDP Leader Jagmeet Singh has made the increased profits a key issue for his party, calling on the Liberal government to impose an “excess profits tax” on corporations such as major grocery chains.
Grocery CEOs shot down those claims in March at a parliamentary hearing where they defended their “reasonable profitability” while insisting they are doing everything they can to keep prices low for Canadians, pinning the blame on suppliers and the global market.
Most recently, in its latest quarterly earnings report July 26, Loblaw attributed its higher profits to increased costs from global suppliers, while noting gross margins were lower.
“Counter to what we would expect if firms were using their market power to raise prices, increases in the markups of Canadian firms do not coincide with the high inflation in 2021 and 2022,” the Bank of Canada researchers said.
“Rather, the data suggest that the contribution of changes in markups to inflation was limited.”
Company markups grew at onset of COVID-19
The researchers said they used Statistics Canada data and compared the average growth rate of company markups with inflation data from 2018 to 2022.
In their report, the central bank researchers focused on a “representative sample of Canadian firms” across sectors.
The businesses they examined were in the agriculture, construction, energy, information, manufacturing, retail trade, services, transportation and warehousing, and wholesale trade sectors.
The researchers found the average growth rate of company markups to be highest in the manufacturing sector (22 per cent) and lowest in the agriculture sector (2.2 per cent) over those four years.
They explained that in the pursuit of profits, companies set prices above their marginal costs of production, which implies that changes in prices can be broken down into the changes in businesses’ costs and changes in their markups.
Both increases in costs and markups may be passed through to consumers in the form of higher prices, resulting in inflation, the report noted.
“Market competition and the responsiveness of demand to prices determine the market power that firms wield and the extent to which they can mark up the prices of their goods and services,” the researchers noted.
“We find that firms’ measured markups did grow after the onset of the COVID-19 pandemic. However, our results do not indicate that this markup growth was inflationary. Most of the growth in markups occurred during 2020, a year characterized by low inflation.
“Moreover, markup growth began to decline in 2021 as inflation started to increase, suggesting that the contribution of changes in markups was mild and decreasing. Specifically, our estimates suggest that markup growth accounted for less than one-tenth of inflation in 2021.”
By 2022, when inflation reached its highest levels in recent history, growth in markups was near zero or even negative, the researchers added.
That indicated that the rise in inflation was driven primarily by changes in costs, rather than by businesses using their market power to increase prices.
“Why did this increase in markups not contribute significantly to inflation? We show that markup growth reached its highest level because of a contraction in firms’ costs. More specifically, the declines in firms’ costs outpaced the declines in their sales, and markup growth peaked during the pandemic-related public health interventions,” the researchers said.
“We observe a mild contribution of markup growth to inflation in 2021, partially explained by demand rebounding faster than costs. However, the fact that markup growth fell to zero the following year indicates that firms were likely smoothing out their price increases in anticipation of high demand and rising costs rather than leveraging increases in market power.”
— with files from Global News’ Craig Lord