Fears grow that firms are using ‘the cloak of inflation’ to boost their profits at the expense of hard-hit consumers

Profiteering by companies means moves by the European Central Bank ( ECB) to keep hiking interest rates are likely to have little effect in its battle to control rampant inflation.

But the rate-hiking frenzy will continue to cause pain for borrowers.

This month, hopes that the rate of inflation in Ireland would ease were dashed as the latest figures showed a higher rate than the previous month.

Prices rose by 8pc in the year to February, and by 1.4pc in the month, the Central Statistics Office (CSO) said, up from 7.5pc in the year to January.

So what is causing inflation to stay so high, and what is stopping it falling?

This week Philip Lane, the chief economist of the ECB, warned that companies across Europe were using a fall in input costs to boost their profits, instead of passing on lower prices to consumers.

The Irishman, who is the former governor of the Irish Central Bank and former professor of economics in Trinity College, said the easing of some supply chain bottlenecks has not made its way into retail prices.

This is despite producer prices decreasing strongly since April last year, he told an audience in Trinity College.

He said this has enabled some firms to increase their profit margins. But the ECB does not expect the “extraordinary conditions underpinning profitability in 2022” to persist, which should mean lower inflationary pressures.

Data presented to the ECB in the last few weeks is reported to show company profit margins increasing across Europe, rather than falling as energy costs and other costs come down. This has led to claims that companies are raising prices at the expense of consumers, something that is causing huge anger.

Consumer goods companies in the eurozone boosted the operating profit margins by a quarter last year to an average of 10.7pc, the ECB Governing Council is understood to have been told in a private briefing from Prof Lane and others.

This means profits, and not labour costs or taxes, are accounting for the lion’s share of price pressures in the 20-member eurozone.

And companies in this country are recording record profits. Among those to report bumper profits in the last few weeks are nutrition and dairy ingredients firm Glanbia, drugs distributor and owner of pharmacies Uniphar, owner of the Penneys retail chain Associated British Foods, and Aer Lingus.

Then there are the energy companies. Electric Ireland-owner, ESB; Bord Gáis-owner, Centrica; and owner of SSE Airtricity, SSE, have all recorded surging profits. But they are at pains to point out they are losing money on their residential supply businesses. The profits are mainly coming from power generation.

Really galling for consumers was the €5.2bn profit recorded by drinks giant Diageo last year, which was reported just as it was imposing a 12c hike in the price of Guinness in this country.

Then there is the price of petrol and diesel.

British energy groups BP and Shell reported record profits for 2022. BP reported annual profits of $27.7bn (€26.2bn), double the previous year’s figure. Shell reported its highest profits in 115 years, with $39.9bn in 2022, double the previous year’s total.

Economist Austin Hughes said there is evidence from the CSO’s national accounts of companies here and across Europe boosting their profits during the price-rising spiral.

“Looking at the bowels of last week’s national accounts data, it seems clear that profits of domestic Irish companies rose in 2022.

“In part, this is a ‘volume’ story as the domestic economy grew strongly, but it looks as though output prices grew faster than input costs at the aggregate level meaning that there was some [profit] margin build-up.”

He said circumstances vary hugely from company to company “but overall, it seems that [profit] margin building did boost inflation here as elsewhere”.

He said with Irish hourly earnings rising just 3.2pc in this country and inflation at 7.8pc in 2022, price pressures are clearly not wage driven.

Tom McDonnell, co-director of the trade-union funded Nevin Economic Research Institute think-tank, is in no doubt companies are using inflation as cover to boost their profits at the expense of consumers. “If businesses see an opportunity to make super-normal profits they are always going to do that.

“Why would they not do it? It is like expecting a tiger not to eat its prey.”

He said the ECB was worried about a wage-price spiral, but policymakers need to look more closely at super-normal profits and the impact it is having on prices and on consumers. He said one-off windfall taxes were the best way to tackle profiteering.

The government in Greece has tabled measures to curb inflation in essential goods, with similar measures being debated in France and Spain.

Despite having a string of regulators in this country, prices are not regulated, whether that is energy, telecoms, mortgages or food prices.

All this means the pressure is set to ramp up on the Government for more intrusive regulation, with more calls for some element of price controls to stop the profiteering.

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