Inflation makes everything in life more expensive. But is that always justified? No, says a new evaluation by the Munich Ifo Institute. Economists have identified several industries that take advantage of inflation. However, little can be done about it.

Prices last rose by 10.0 percent in November compared to the previous year. Energy from firewood (plus 96 percent) to natural gas (plus 85 percent) to heating oil (plus 58 percent) and vegetable oils (plus 82 percent) lead the hit list. In their wake, the prices of most other products are also rising. Finally, high energy prices also indirectly increase the cost of electricity, chemical precursors, fertilizers made from natural gas, thermal energy for factories and heating in shops and offices.

As a result, almost every company in Germany can push through price increases and thus argue that their own costs have increased accordingly. After all, hardly any customer can check how much more a company actually pays for energy or preliminary products that are more expensive due to high energy prices.

However, some companies take advantage of this to raise prices even though their costs have not increased. This is the result of an evaluation by economists at the Munich Ifo Institute. “Inflation winners” they call companies that have raised prices without justification. “Some companies seem to be using the increase in costs as an excuse to improve their profit situation by increasing their sales prices even more,” write the authors.

Specific companies cannot be identified. To do this, researchers would have to look closely at their books, which is not possible. However, the official data from the national accounts allow conclusions to be drawn about the sectors in which prices were increased without justification. To do this, researchers compare the nominal and price-adjusted gross value added of economic sectors published quarterly by the Federal Statistical Office.

To put it simply, the gross value added indicates all sales revenues of an industry minus their initial costs. The nominal value is the actual income. For example, if a supermarket buys a packet of butter for EUR 1.50 and sells it for EUR 2, the nominal gross value added of the retail trade would increase by EUR 0.50.

If a supermarket now has to pay 3 instead of 1.50 euros for a packet of butter and therefore also doubles the final price from 2.50 to 5 euros, then the nominal gross value added would now be 2 euros instead of 0.50 cents. However, since the gross value added is supposed to be an indicator of the prosperity of a society, this would only have quadrupled due to inflation, although in the end only one packet of butter was sold.

That is why there is the price-adjusted gross value added. For this purpose, the prices of the previous year are simply assumed this year as well. No matter how much more expensive a packet of butter has become, it would still only be included in the statistics at 0.50 euros. The price-adjusted gross value added only increases if an economic sector really does more – in the example above, it sells more butter.

From these two indicators, economists can therefore calculate in which sectors of the economy prices have increased due to higher initial costs and where not. The nominal gross value added rose by 7.3 percent year-on-year by the end of June 2022, but the price-adjusted value by only 2.0 percent. The difference of 5.3 percent can be explained simply by the increased costs for primary products from abroad. They rose in price by 8 percent in the same period. Overall, companies’ profits increased at a lower rate than their costs.

However, this does not apply to all areas: Agriculture stands out the most with a difference of 60 percent between nominal and price-adjusted value added. In construction, prices rose 20 percent more than justified, in retail by 9 percent. These effects also amplify the general inflation rate. On average, companies in these sectors have benefited from inflation and significantly increased their profits.

There are several explanations for this. In agriculture, for example, it is because the prices for agricultural products are often based on world market prices. These, in turn, have risen sharply due to the Ukraine war and the lack of exports of wheat and sunflower oil from Russia and Ukraine. Many farmers have also already factored in the price increases for fertilizers in their costs, even if they were able to use up stocks of cheaper fertilizers.

However, the Ifo economists have no excuses ready for the construction industry and retail trade: “This only allows the conclusion that many companies here have apparently seized the opportunity to raise their prices beyond the increase in the price of wholesale purchases,” they write. Both sectors could have benefited from the fact that the demand for their services rose sharply after the corona pandemic. After all, many shops and businesses were closed again and again for two years. Construction companies also benefit from the fact that many new houses and apartments are currently having to be built in large cities and metropolitan areas in order to cope with urban growth.

However, the authors argue that the state should therefore intervene. Ultimately, prices would still be formed based on supply and demand. Instruments such as the often discussed “excess profit tax” would also tap into legitimate profits and also artificially distort the market. There is also little that can be done in terms of antitrust law as long as companies cannot prove that they had agreed on prices – which is unlikely. Instead, consumers are asked. If they compare prices frequently and only buy from the cheapest offers, this puts pressure on the company so that they cannot raise prices without justification.

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