A rebound in corporate profit margins over the next year could prevent inflation falling as quickly as the Bank of England is expecting. That’s not the conclusion of a leftist thinktank or trade union. It’s a clear message from the central bank itself, or more precisely from a group of its in-house economists, whose published research examines how a wide spectrum of businesses plan to cope over the next few months and into 2024.
The data is stark. According to the research, 45% of companies surveyed say they plan to increase their profit margins in the coming 12 months. Almost a third (32%) expect “no material change” to margins and only 23% expect to suffer a fall.
The economists found the top 10% of profitable businesses had successfully driven their margins to approaching 30%, and will make further progress towards this target over the next year. This led the researchers to conclude: “Margin rebuilding could make some contribution to inflation persistence.”
Questions about profits have formed part of the researchers’ questionnaire only since May this year but, impressively, they have also examined the respondents’ annual accounts as far back as 2005.
This revealed that the average profit margin of the top 10% of firms was below 20% in 2005 and had grown in the intervening years to about 27%. Next year the average for this group of firms will be 28% – a full 10 percentage points higher than what they enjoyed in 2005.
Not all businesses are flourishing. The survey found the weakest firms had survived on profit margins at or below zero for much of the last decade. Some might ask how they managed to survive if their margins were negative, but that is not made clear in the research.
What is clear is that whatever position they are in today – profit margins low or high – UK businesses are looking to improve that over the next year. On average, the survey found firms were on course to increase margins to their highest ever level, to just shy of 10%.
This means that most British companies, whatever their size, are signalling that though they will benefit from falling costs – for energy in particular – they will not pass that benefit on in the form of price cuts.
Until now, the Bank has brushed off concerns that profiteering by companies has played a big part in the inflation saga. Governor Andrew Bailey has urged workers on many occasions to forgo wage rises to help prevent inflationary pressures building on companies. He expects to see a mechanical reaction, almost as if he is talking about physics and not economics, from wage rises feeding directly into prices.
Yet 21st-century capitalism is anything but mechanical. Firms set prices based on what they can get away with in markets where there is restricted competition and where brands have leverage with consumers.
As Paul Donovan, chief economist for UBS Wealth Management, says: “Profit-led inflation is rarely, if ever, an economy-wide measure, but instead is focused towards the end of the supply chain at a retail level, or with big-name consumer brands who have marketing power.”
There is always a danger when looking for causation, especially when data points to a strong conclusion. In this case, the small sample size used by the Bank’s survey is notable: it covers 2,500 of the UK’s 5m-plus companies. This may be a small sample, but the Bank believes it can provide significant information about firms in relation to many other subjects, so why not this one?
And the conclusion must be that those companies which were most able to boost their profit margins before and after the pandemic inflation shock are about to do it again.
The International Monetary Fund and the European Central Bank have discussed the impact of excessive profits on several occasions. So it’s good to see that at least some inside the Bank appear to acknowledge the same.
Unite’s general secretary, Sharon Graham, who has accused Bailey of ignoring the impact of profiteering in his TV appearances and speeches, says the Bank’s research supports the union’s own detailed critique.
Unite has shown how the big supermarkets have rebuilt their margins since the years of intense competition before the pandemic, and also illustrated how other large companies, including Nestlé and Procter & Gamble, have sailed through the cost of living crisis almost untouched.
After two years of being ignored by policymakers, she can have the last word. “Ever since the greedflation crisis began,” she says, “the Bank of England has been attacking workers’ wages while downplaying corporate profiteering.
“Now the central bank’s own analysis supports what Unite has argued all along about inflation. Companies are raising prices simply to boost their own profit margins.”
