Inflation and the evolution of corporate profit margins

Economists at the National Bank of Belgium have found no evidence of widespread “greedflation” in Belgium. With that in mind, how should recent changes in corporate profit margins be understood from a long-term perspective? What are the structural factors at play? To what extent do profit margins reflect firm-level realities and were corporate profits a driver of the recent surge in inflation?

Profitability is an important concept in (business) economics which, along with other factors, influences firms’ hiring and investment strategies. Higher profits are typically associated with greater economic growth and employment. Moreover, profitability can provide a buffer to absorb external shocks, such as a slowdown in demand, a sudden increase in input prices (e.g. energy), higher financing costs or, as we have seen in the recent past, a combination of these. However, increasing corporate profits are often criticised in public discourse: they are said to be a sign of corporate “greed” and, especially recently, to contribute to higher inflation which erodes purchasing power.

The evolution of firm profitability should also be viewed against the backdrop of the cost competitiveness of Belgian firms and the broader macroeconomic situation. Belgium has a detailed statutory framework to prevent negotiated wage increases from leading to a sustained deterioration in competitiveness which could weigh on investment, employment and growth. However, the recent spike in inflation and resulting significant indexation of nominal wages have put a strain on this framework.

An earlier study by Bijnens et al. (2023) showed, based on microdata, that recent price increases had mainly been fed by higher input costs and that, also from a microeconomic perspective, firms had not generally increased their profit margins.

This article builds on and extends that analysis. First, we place the recent evolution of profit margins in a broader context by looking at long-term trends. In doing so, we try to reflect the impact of composition effects on those trends, compare the situation in Belgium with that in the main neighbouring countries, and identify other factors that could come into play. Second, using more granular balance sheet data, we examine different indicators of the “typical” firm’s profitability to complement the information derived from national accounts statistics and macroeconomic indicators. In this regard, it should be noted that the macroeconomic indicators can differ substantially from the reality at firm level. Finally, we revisit the question of whether and, if so, to which extent firm profits have contributed to inflation in Belgium.