21st Sep 2023


Study: 90% of Spanish inflation 'driven by corporate profits'

  • OECD data shows corporate profits almost completely drive Spanish inflation (Photo: OECD)
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Spanish company profits are driving inflation. That is the conclusion reached by the Spanish Economic and Social Council (CES) in the annual report on the socioeconomic and labour situation in the country published on Wednesday (7 June).

Its findings show that the increase in gross profits drove 90.7 percent of domestic inflation in 2022. Wages contributed only 10.9 percent to the general price rise — with taxes and subsidies resulting in a slight adjustment downward. These insights follow a series of other reports that suggest Spain is an outlier when it comes to corporate profits.

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  • Unit profits have increased across all euro area countries and sectors compared to the GDP-deflator (domestic generated inflation). In Spain the difference stands out among other large economies. (Photo: EU Commission)

In a report published by the Organisation for Economic Co-operation and Development (OECD) on Wednesday, a graph showed that Spanish inflation is almost exclusively driven by unit profits, unlike other EU member states where inflation drivers are more mixed.

Recent EU Commission data also showed corporate profits in Spain vastly exceed domestic inflation, setting it apart from other big economies in Europe.

This suggests that companies have increased prices more than the general cost increase, and that it's happening in Spain more than elsewhere.

Spanish profits?

The question is, why? There is a growing consensus among economists that inflation in the last few years can be attributed chiefly to profits.

On Monday, European Central Bank president Christine Lagarde told MEPs that "certain sectors" in 2022 and 2023 have taken "advantage" of higher costs to push through prices above cost increases, thereby raising their profits.

But she also said data on profits needs to be improved. "The contribution of profits to inflation has gone a little bit missing, which has to do with the fact that we don't have as much good data on profit as we do on wages," she said. "If I had a choice, I would like to improve our data on profit," she added, to "really understand and appreciate the transmission of final prices."

Returning to the Spanish case: the OECD and commission data cannot be used to show companies have increased their profit share directly as it only shows the total value added. The CES data does show gross corporate profits in Spain are up 3.1 percent in the first quarter of 2023 when compared to the pre-pandemic high in 2019, with some sectors doing better than others. Manufacturing and financial services, for example, have increased profits by 20 percent since 2019, while construction is down 22 percent.

But this can also be a sign of recovery as the OECD raised its growth figure for Spain to 2.1 percent in 2023, making it the fastest-growing large economy in Europe.

And while much of this growth is reflected in higher corporate profits, which are driven by external demand and sizable public spending (up to €70bn) under the country's recovery plan, it doesn't tell much about the actual profitability of companies, as costs may also be higher.

An issue raised in a recent research paper is that companies can increase profit shares even while profit margins remain constant. Fabrizio Colonna, researcher at the Bank of Italy, recently explained in a working paper that this occurs when intermediate input costs in the supply chain increase faster than the cost of labour (as happened in the past years due to the energy crisis and pandemic bottlenecks).

Thus a company can raise its prices along with the higher input cost (of energy or raw materials). But when wages remain unchanged, margins stay the same while the profit share in the economy increases. So while profit margins are maintained, all the burden of the adjustment is borne by real wages.

What about wages?

"Indirect evidence" of higher corporate profitability can be found when looking at the share of profits in GDP, the OECD notes. In most advanced economies, the gross operating surplus to GDP ratio in 2022 was higher than in 2019. In Spain, according to CES figures, corporate profits now make up a larger percentage of total GDP (47.9 percent now, compared to 40.8 percent in 2019), while wages have dropped to 52.1 percent, down from 59.2 percent in 2019.

This is reflected in an average real wage loss (corrected for inflation) of three percent in Spain, higher than the EU average. In this, however, Spain again is an outlier as it is the only country where real wages have fallen, but disposable income increased by just under one percent.

This is due to government support measures. Once these start to wind down, the impact of profit-led inflation on households will become more apparent.

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