The International Monetary Fund (IMF) has defended its recommendation that the European Central Bank (ECB) should maintain its tight monetary policy despite the fact that its own recent study concluded that soaring corporate profits – rather than rising wages – are principally responsible for Europe's current inflation crisis.
Of the mechanisms to bring inflation under control, the IMF considers high interest rates as preferable to other measures such as imposing stricter limits on corporations. Speaking to The Brussels Times, fund spokesperson Meera Louis suggested that high ECB interest rates will offset the inflation that results from wages being raised in line with prices going up.
She explained that high ECB rates generally translate to elevated borrowing costs and higher savings rates, thereby incentivising consumers to spend less on goods and services. This prevents prices from being inflated because businesses are eager to attract consumers with favourable prices.
European Central Bank President Christine Lagarde. Credit: Belga / James Arthur Gekiere
But although the IMF's own study indicates that rising corporate profits are exacerbating inflation, the organisation's views on how to deal with this seem at odds with other analysts, who tend to argue against high interest rates.
For instance, the European Trade Union Confederation (ETUC) recently stated that "it is now widely accepted that inflation is being driven by excess profits and not by consumer spending" (editor's italics). However, it strongly condemned the ECB's rate hikes, arguing that they would pile "further pressure on struggling working people" and do "nothing to stop the profit-price spiral".
Rather than additional rate increases, the ETUC called on European policymakers to "deal with [inflation's] real cause through properly enforced windfall taxes and price cuts".
Last Thursday, the ECB raised interest rates for the ninth time in the past year, bringing its benchmark deposit facility rate to a record high of 3.75%. Eurozone inflation fell to 5.3% last month after peaking at 10.6% in October 2022.
Correlation or cause?
Whilst the aforementioned study seems to link corporate profits to inflation, Louis denied that this was the case and sought to portray the organisation's publication in a more neutral light, questioning the relation of growing financial returns to inflation. Indeed, she asserted that IMF analysis "does not really allow for causal statements".
"We want to emphasise that while our results show that profits have performed better than wages so far, this is not equivalent to profits being the principal cause of high inflation."
But such a claim is extremely difficult – if not impossible – to reconcile with the study, which made pertinent conclusions such as: "Rising corporate profits account for almost half the increase in Europe’s inflation over the past two years as companies increased prices by more than spiking costs of imported energy."
The study's authors also claimed that "companies may have to accept a smaller profit share if inflation is to remain on track to reach the European Central Bank’s 2% target in 2025" – a claim which logically entails that rising corporate profits are, in fact, responsible for Europe's high inflation rate.
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Indeed, ECB President Christine Lagarde herself recently suggested that soaring profits are the principal cause of high eurozone inflation. "Unit profits contributed around two-thirds to domestic inflation in 2022," Lagarde said, adding that this is twice as much as profits' average contribution to inflation over the past 20 years.
The IMF and ECB are not the only institutions which have attributed Europe's inflation crisis to soaring profits. One recent study by ULB economics lecturer Olivier Malay "conservatively" estimated that in Belgium alone companies' practice of boosting their profits through unnecessary price hikes (otherwise known as "greedflation") cost the average citizen €3,200 over the past two years.
