What is profit-push inflation?

To what extent is the surge in consumer price inflation partly the result of businesses opting to increase their profit margins?

The final price that consumers pay for the goods and services they buy includes a profit margin. And when businesses decide that economic conditions are suitable, they may decide to increase or widen this profit margin causing retail prices to climb higher. One way of measuring this is to look at the gross profit made for each £1 paid in wages and salaries to workers (otherwise known as labour compensation.

Businesses are well-placed to raise prices in a bid to increase profit margins when:

1. They have significant market power and when demand for their products is estimated to be price inelastic. These excess profits from monopoly power are sometimes called monopoly or supernormal profits
2. Economy-wide inflation is increasing which then makes it easier for firms to “hide” a profit rise among claims of increasing supply-chain costs

A recent research report from the Institute for Public Policy Research (IPPR) has found that “the profits of the largest non-financial UK companies were up 34 per cent at the end of 2021 compared to pre pandemic levels.” They point to extensive market power in many industries where the concentration ratio is high. The economist and journalist Will Hutton points to this in his tweet embedded below.

One market under investigation is the retail fuel sector. Wholesale petrol and diesel prices have fallen quite sharply in recent weeks, but prices at the pump have remained stubbornly high with suggestions that petrol retailers have opted to make a higher percentage profit margin on each litre of fuel sold to motorists.