The IMF argued that corporate profits explained a large part of inflation

The analysis stems from a study titled “Inflation prospects in Europe depend on how wage increases are absorbed by corporate profits” Prepared by Economists Niels-Jakob Hansen, Frederic Toscani, Jing Zhou.

In the document, economists said inflation in Europe peaked at 10.6% in October 2022 after import costs stemming from the war between Russia and Ukraine and companies passed on to consumers more than represented by this direct cost increase. “Since then, inflation has eased to 6.1% in May, but core inflation – a more reliable measure of underlying price pressures – is still holding steady.”, they explained.

“The increase in inflation year-to-date mainly reflects the increase in profits and import prices. Profits are responsible for the 45% price increase since early 2022. Import costs account for about 40% of inflation, while labor costs account for 25%. Taxes had a slightly deflationary impact,” they explained.

The report explained that European companies were more protected against inflation than workers, while company profits “were about 1% above their pre-pandemic levels in the first quarter of this year”, while workers’ wages “It was about 2% below trend.”

According to experts, “Now workers are demanding wage hikes to restore their lost purchasing power. If inflation is to be kept on track to reach the European Central Bank’s target of 2% by 2025, companies will have to accept a lower profit share.As predicted in our latest World Economic Outlook (WEO) report.”