Prices and profits after the pandemic
Article
New analysis by economists at IPPR and the Common Wealth think tank shows that the profits of the largest non-financial companies were up 34 per cent at the end of 2021 compared to pre pandemic levels – rising significantly faster than inflation and wage growth. The analysis shows that this increase is being driven by a small number of companies, with 90 per cent of increases in profits accounted for by only 25 companies. The report argues that some firms could have considerable market power with very few competitors, and this could be making the cost of living crisis worse by raising prices beyond what would be economically justified. The report notes that there is a high degree of market concentration in some industries with the highest turnover.
This paper serves as a first step to analysing the behaviour of profits in the UK. This is intended to be as a discussion paper to stimulate debate rather than the final word on the issue. To do so, as a conceptual framework, we highlight the following.
- There are some big winners from extreme price increases in certain markets, such as gas or certain commodities. As a result of such spikes, some companies are seeing their profits increase by billions of pounds, including as a result of price spikes caused by the war in Ukraine. We call such profits, caused by extreme and sudden price increases ‘windfall profits’.
As a separate phenomenon, the market power of some firms could be exacerbating inflation. This could arise if powerful firms are increasing their prices by more than they would if it was a fully open and competitive market. This could happen at any time, but it could be more pertinent in an environment of generally elevated inflation. We call such profits ‘excess profits’.
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