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The burden of inflation has been borne more by the customer

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High inflation has allowed businesses to increase their prices.


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Companies are much more willing to raise their prices lately, and the weight of high inflation is weighing more and more on consumers.

If the phenomenon is observed equally at the grocery store, at the car dealership or at the gas station, the Bank of Canada is starting to become aware of this trend, despite its efforts to bring down inflation.

Speaking to a parliamentary committee in Ottawa this week, central bank governor Tiff Macklem said he had noticed a new trend among businesses.

In recent decades, when companies generally noted an increase in the cost of their inputs (raw materials, production costs, etc.), they remained quite cautious when passing on [this cost to] the invoice for goods and services, explained Tiff Macklem.

Their reasoning was simple: they feared losing customers. However, this philosophy does not seem to apply in this period of high inflation, noted the Bank of Canada in turn.

When input prices increased, they were reflected much more quickly in the prices of finished products, Macklem noted. Households therefore absorb much more of the inflationary impact: this is what we can see quite clearly in the data.

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Bank of Canada Governor Tiff Macklem at a press conference in Ottawa (File photo)

Questioned about the cause of current inflation in Canada, which would be attributable to price increases greater than increases in business costs, Mr. Macklem does not x27;did not provide a numerical response, unlike other central banks which revealed their data.

European Central Bank President Christine Lagarde recently explained that in the two decades leading up to 2022, corporate profits were responsible for around a third of inflation. Last year, this ratio even climbed to two-thirds.

Companies cannot continue to charge the prices we have seen recently.

A quote from Christine Lagarde, President of the European Central Bank

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The President of the European Central Bank, Christine Lagarde.

Paul Donovan, economist at the Swiss bank UBS based in London, United Kingdom, specifies that this phenomenon is well known: it is ;profit-driven inflation.

Widespread almost everywhere in the world, but to different degrees, this inflation is based on a key factor: consumers must overwhelmingly believe that price increases are justified, otherwise they will not accept them.

Profit-based inflation works until consumers begin to rebel against profit-based price increases disguised as other factors, Donovan told CBC News.

In Europe, according to him, several parameters indicate that consumers have reached the tipping point of enough is enough, the best place to observe it being… in the grocery aisle.

In the United Kingdom, major grocery chains have started offering deep discounts to some customers, following flagging sales.

In the United States, a report from the Federal Bank of Kansas City indicated that margins increased by 3.4% in 2021. This data therefore indicates that they are responsible for half of the increase in American inflation rate that year.

Jim Stanford, economist and director of the Center for Future Work, welcomes the change in discourse from central banks which are beginning to recognize that corporate profits have played a role a disproportionate role in inflation, when Canadian economic discourse tended to point to other factors.

For the past two years, Tiff Macklem has been talking about the so-called overheating of the job market, he said in an interview at CBC News. Today, I think they finally recognize that this is not the case, or at least that it is not the case as a whole.

Over the past year, advice to consumers has simply boiled down to reducing spending or increasing income, but Mr Stanford says it is misleading to put the onus on the customer to combat the problem. x27;inflation.

It is not reasonable to expect this that consumers solve the problem by becoming bargain hunters and spending half their week looking at grocery store flyers.

A quote from Jim Stanford, economist and director of the Center for Future Work

Evidence shows that consumers are burning out, a he noted, noting that food store and retail sales are down for the last three months.

The last two quarters in Canada have seen a partial but significant return of profitability to normal levels, the economist added confidently.

This reinforces the idea that profits have been linked to the explosion in post-pandemic inflation, because the rise, profits and prices have gone hand in hand, but on the downside, they are also falling, he concludes.

Based on reporting by Pete Evans, CBC News


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