Profits, Not Wages, Have Driven Canadian Inflation

Every January, the Globe and Mail newspaper publishes a fascinating set of charts (curated by journalist Jason Kirby) prepared by Canadian economists, with their insights into economic trends likely to shape the following year. Centre for Future Work Director Jim Stanford was invited again to participate in the collection. He submitted the following chart and text, highlighting the dramatic increases in corporate profits in Canada that have been the dominant distributional outcome of recent inflation.

In recent months, the Bank of Canada has focused on the labour market as the main culprit behind higher inflation: The unemployment rate is too low, wages are rising too fast and this so-called “overheating” is driving up prices. This echoes conventional fears of a wage-price spiral like the one in the 1970s. But empirical evidence suggests wages have lagged inflation – not caused it – by an average of 2.5 percentage points per year since early 2021.

However, another component of production costs – profits – has grown much faster and further, and hence is more culpable in explaining the inflation surge. Corporate profits have swelled dramatically during the pandemic, to the highest share of GDP in history. And those profits are concentrated in the same industries that lead inflation: petroleum, real estate, building materials, car dealers and, yes, supermarkets.

Let’s define unit profit cost as the amount of corporate profit built into each dollar of real output produced in the economy. Unit profit cost has soared almost 50 per cent since 2019. Unit labour costs grew one-third as fast. So instead of targeting workers with anti-inflation medicine, we might consider why profits have grown so substantially – and find ways to short-circuit the profit-price spiral that is fueling current inflation.

The leading role of corporate profits in driving inflation is further confirmed by the close correlation between this rise in unit profit cost, and the corresponding trend in inflation. Early in the pandemic, with production suppressed by health restrictions, profits plunged – and consumer prices actually declined for several months (a phenomenon called deflation). Later, the global economy re-opened but supplies in several industries were still constrained by transportation disruptions and energy price shocks. Companies in strategic sectors took advantage of the combination of pent-up consumer demand and pinched supply chains to increase prices quickly – and profits surged dramatically. More recently, in the latter part of 2022, those supply and energy price shocks abated considerably. Profits fell, and so did prices.

Profits and Prices, 2019-2022

Further stabilization of global supply chains, and moderation in energy prices, will result in further easing of inflationary pressures. Efforts by central banks to achieve a faster reduction in inflation through deliberate restrictions on economic growth and employment are not necessary, and will impose large and lasting consequences on workers – who have been the victims of inflation, not its cause.

For more detailed evidence on the role of record profits in 15 strategic sectors in driving the overall rise in prices, please see our recent paper: 15 Super-Profitable Industries Fuel Canada’s Inflation.