Gabija Zemaityte and Danny Walker
Inflation has been high in many countries since 2021. Some have said that companies have increased their profits over that period: so-called ‘greedflation’. We use published company accounts for thousands of large listed companies to look for signs of increased profits in the data. Consistent with previous analysis of aggregate incomes, price indices and business surveys, we find no evidence of a rise in overall profits in the UK – prices have gone up alongside wages, salaries and other input costs. Companies in the euro area are in a similar position. However, companies in the oil, gas and mining sectors have bucked the trend, and there is lots of variation within sectors too – some companies have been much more profitable than others.
Recent analysis by Sophie Piton, Ivan Yotzov and Ed Manuel has shown that corporate profits have been relatively stable in the UK and that profits are unlikely to have been a big contributor to inflation. Others have suggested that the trend in the euro area has been somewhat different. In this post we use a novel data source to look at this question: the information companies have reported in their accounts.
Company accounts provide a window into how profits have evolved
Large companies that are listed on the stock market publish company accounts at regular intervals, which give a summary of their operating performance. We use a sample of more than 1,000 companies per year – based on accounts that are currently available up to the end of 2022 – to analyse how profits have evolved during the high-inflation period.
Why look at large companies? They play a major role in the UK economy – they account for 40% of total employment and almost half of total turnover. There is also evidence that they have more market power than smaller companies, so are more likely to be able to increase profits.
We compute the ratio of profits to value added for all non-financial listed companies in the UK and the euro area. The profit measure we use is earnings before interest and taxes (EBIT), which is a standard accounting measure. Value added is defined as EBIT plus total wage and salary costs at the company level. This measure naturally avoids some of the issues that distort the national accounting data, such as the inclusion of non-market income, tax and self-employment or mixed income.
We compare the UK to the euro area, where companies have faced similar shocks over the last few years, including the Covid lockdowns and recovery, the rise in global supply-chain pressures and the surge in European energy and other raw material prices.
There is no evidence of a significant rise in the profit share on aggregate in the UK or euro area
The profit share has increased only moderately since Covid in the UK and euro area (we focus here on companies in Germany, France, Italy and Spain). It has remained broadly in line with its long-term trend since the early 2000s (Chart 1).
How has the profit share been so stable? Profits have increased significantly in nominal terms in the UK and euro area, by somewhat more in the UK than in the euro area. But this increase in profits has been accompanied by sharp increases in inputs costs. Indeed, total costs – defined as the sum of the cost of goods sold, wages and salaries – has increased by around 60% in the Euro area since 2020, and around 80% in the UK.
The level of the profit share reflects the set of companies captured in the sample, which tend to be larger, more profitable and more capital-intensive than the average in the economy as a whole – and the oil and gas sector is over-represented. These compositional issues mean we should focus on analysing changes in the UK or euro area over time, rather than differences between the two. But it is notable that in aggregate, the profit share has been broadly stable even when excluding oil, gas and mining sectors.
Chart 1: Profit share in UK and euro area based on company accounts
Notes: Sum of total profits (EBIT) as a ratio to value added (EBIT plus wages and salaries) across all non-financial listed companies in each region. Dotted line is a linear trend. Euro area includes non-financial companies in Germany, France, Italy and Spain.
The oil, gas and mining sectors have seen a large increase in profits in the UK and euro area
Chart 2 compares the profit shares in 2022 to those in 2021 at sectoral level, for the UK and the euro area in turn.
Most sectors have had very little change in profit shares in the UK. But three sectors have seen an increase in profit share that is larger than 5 percentage points. Those sectors are oil, gas and mining; utilities; and other services (which includes industries such as gambling and leisure facilities). Together they make up around 7% of total output in the economy.
The euro area has had stable profit shares for most sectors too. The sectors that have seen an increase in profit share that is larger than 5 percentage points are oil, gas and mining, professional services and construction. Those sectors account for around 12% of total output in the economy.
Chart 2: Profit share in UK and euro area by sector
UK companies
Euro area companies
Notes: Average profits (EBIT) as a ratio to value added (EBIT plus wages and salaries) in 2021 and 2022 across all non-financial listed companies. Excludes companies with negative profits. Bubble size is proportional to sectoral gross value added in the national accounts. Solid line is the 45 degree line – sectors on the line have had a constant profit share.
Every sector includes companies that have done much better than others
While only a few sectors have seen a significant increase in profit shares, there is lots of variation within sectors. The newspapers are full of stories about individual companies that have done well. Chart 3 shows the share of revenue within each sector accounted for by companies that have seen an increase in their profit share of at least 5 percentage points.
In the UK, the sectors with the highest share of companies with large increases in profit share are other services (88%), oil, gas and mining (66%) and utilities (43%), which is unsurprising given those sectors did well on aggregate. But all of the other sectors contain companies that have seen large increases in profit shares. The smallest share is in the construction sector, where less than 2% of companies have seen a large increase in profits.
In the euro area, on the other hand, the top three sectors with the highest share of companies with large increases in profit share are oil, gas and mining (52%), transport (45%) and wholesale trade (43%). Other than oil, gas and mining, this paints a different picture to the aggregate results, which means that those results are driven by a few large companies. Consistent with the UK results, all sectors contain companies that have seen large increases.
Chart 3: Share of companies reporting more than a 5 percentage point increase in profit share from 2021 to 2022 by sector
Notes: The chart shows the proportion of companies in each sector and region – weighted by total revenue – where aggregate profits (EBIT) as a ratio to value added (EBIT plus wages and salaries) rose by 5 percentage points or more from 2021 to 2022. Sample is all non-financial listed companies. In the euro area it includes companies in Germany, France, Italy and Spain.
Summing up
This post uses a large sample of listed UK and euro-area companies to test for the existence of ‘greedflation’. Consistent with other sources, it doesn’t look like the corporate sector as a whole has seen an abnormally large increase in profits during the period of high inflation. That is because wages, salaries and other input costs have gone up by just as much as profits. The oil, gas and mining sector consistently bucks the trend, which is unsurprising. And there are of course many examples of individual companies in all sectors that have been particularly profitable.
Gabija Zemaityte works in the Bank’s Macro-financial Risks Division and Danny Walker works in the Bank’s Deputy Governor’s office.
If you want to get in touch, please email us at bankunderground@bankofengland.co.uk or leave a comment below.
Comments will only appear once approved by a moderator, and are only published where a full name is supplied. Bank Underground is a blog for Bank of England staff to share views that challenge – or support – prevailing policy orthodoxies. The views expressed here are those of the authors, and are not necessarily those of the Bank of England, or its policy committees.
