What if inflation had allowed companies to increase their profits?

L’IRIS actually says it has seen a more than 10% increase in Canadian corporate profits over the past four quarters, far outpacing the rise in wages. Research co-author Guillaume Hébert maintains that companies seem to have largely taken advantage of the inflationary environment to raise their prices, a maneuver that would have allowed them to reap record profits while contributing to the acceleration of inflation.

This is what he explained in an interview with RDI, Thursday morning. The inflationary environment has probably allowed some companies in certain sectors to do little more than adjust prices according to production costsargued Mr. Hébert.

A company, when faced with inflation, its production costs will increasehe explained. That being said, obviously there have been some sectors where prices have risen even more than inflation warranted, and so that’s one of the hypotheses that explains why companies find themselves so much more profitable than what they were even before the pandemic.

Unlike our portfolio, inflation hasn’t hurt that of Canadian businesses very much. According to a study by IRIS, their profits have peaked in recent months. This is particularly the case for companies in the food sector. Report by Charlotte Dumoulin

His research colleague from theIRIS Pierre-Antoine Harvey also calls on governments to ensure that household purchasing power is protected against price increases. In his opinion, raising wages to the level of inflation is the most effective measure to counter the problems caused by the general increase in prices.

Faced with fears that rising wages are contributing to the installation of a spiral where inflation would feed wage increases which would in turn lead to high inflation over a longer period, Mr. Harvey replied that the adjustment of wages to the cost of living has no lasting amplifying effect on inflation.

Guillaume Hébert also suggests that governments compensate for general inflation by reducing the tariffs and prices they control, such as hydroelectricity tariffs or the cost of daycare services. They can also support municipalities so that they establish free public transit on their territory.

The study also calls for the implementation of measures to limit the ability of companies to increase prices excessively, such as increased monitoring of the concentration of sectors and the fight against concerted practices on prices.

A solution worse than the problem?

But’IRIS don’t stop there. He also believes that the Bank of Canada is on the wrong track in wanting to control the inflationary surge through a succession of significant increases in interest rates. A solution that Guillaume Hébert compares to a club which strikes indiscriminately on all sectors of the economy at the same time.

The Institute for Socio-Economic Research and Information believes that this strategy of raising interest rates to bring about a slowdown in inflation actually favors the financial community and makes Canadian households bear the economic burden of the fight against inflation.

We could give a slightly different mandate to the central bank and tell it that it can tolerate a slightly higher inflation rate before significantly raising interest rates as it is currently doing, suggests Guillaume Hébert.

Since the early 1980s, every time the Bank of Canada has systematically tried to reduce inflation by raising the key rate, it has caused a recession. […] That’s the danger. She might, the Bank of Canada, have a remedy that’s worse than the problem we’re trying to solve.added Mr. Hébert.

He says some sectors are already showing signs of stabilization. Let’s be patient instead of hitting the economy with a heavy club.

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