Spanish Company Profits Drive Inflation, According to Economic and Social Council Report
Introduction
The Spanish Economic and Social Council (CES) has published its annual report on the socioeconomic and labour situation in Spain, concluding that the increase in gross profits is driving inflation in the country. The report shows that 90.7 percent of domestic inflation in 2022 was driven by the increase in gross profits, while wages contributed only 10.9 percent. This article explores the reasons behind this trend and its impact on the Spanish economy.
Spanish Inflation Driven by Unit Profits
According to a report published by the Organisation for Economic Co-operation and Development (OECD), Spanish inflation is almost exclusively driven by unit profits. Recent EU Commission data also shows that 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.
Why Are Profits Driving Inflation?
There is a growing consensus among economists that inflation in recent years can be attributed chiefly to profits. European Central Bank president Christine Lagarde recently 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. However, data on profits needs to be improved to fully understand the impact of profits on inflation.
Gross Corporate Profits in Spain
The CES data shows that 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. While much of this growth is reflected in higher corporate profits, it doesn’t tell much about the actual profitability of companies, as costs may also be higher.
The Impact on Wages
\”Indirect evidence\” of higher corporate profitability can be found when looking at the share of profits in GDP, the OECD notes. 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 has resulted in an average real wage loss of three percent in Spain, higher than the EU average.
Conclusion
The increase in gross profits driving inflation in Spain has significant implications for the Spanish economy, particularly for real wages. While the impact of government support measures has helped to mitigate the effects of profit-led inflation on households, the winding down of these measures is likely to have a significant impact. Further research and data on profits are needed to fully understand the impact of profits on inflation in Spain.
