Profit-Price Inflation: - Theory, International Evidence, and Policy Implications

In a recent research bulletin,21 BIS economists decomposed changes in the GDP deflator into factor income components, in order to consider the varying roles of wages and profits in explaining the acceleration of inflation after post-pandemic re-opening, and also to model the prospective reduction in inflation in future years. [...] First, the authors affirmed the value of the decomposition approach to understanding the role of factor prices in inflation: “Insights into how the incomes of workers and firms absorb the disinflation burden in the euro area and the United States can be gained by decomposing changes in the GDP deflator into its underlying components.” (p. [...] 17) The BIS analysis indicates the importance of understanding the shifts in factor income shares not only to analysing the causes of the initial post-pandemic surge in inflation, but also to designing effective and fair strategies for achieving lower inflation in the future. [...] Some explanations of the rise of profit margins after the pandemic emphasise changes in customers’ willingness to accept higher prices in the wake of the disruptions and volatility of the post-pandemic economy. [...] So the extent to which the cost of profits is growing, relative to changes in real production, is clearly relevant to understanding the evolution of an increasingly important component of prices – and hence for understanding the causes, manifestations, and consequences of inflation.