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The profitability of UK private non-financial companies remained stable in the first quarter of 2023, according to official data that suggests higher corporate profit margins are not pushing up inflation.
Companies made a net rate of return of 9.9 per cent in the three months to March, the Office for National Statistics said on Thursday, compared with 9.8 per cent in the final quarter of 2022 and lower than the prevailing rate before the onset of the pandemic.
The figure supports the view of policymakers at the Bank of England that “greedflation” — where businesses drive up inflation by increasing prices beyond the extent that their own price pressures would demand — is not responsible for increasing inflation, which stands at 6.8 per cent.
In its August monetary policy report, the central bank said the latest evidence suggested “that firms increasing prices to raise their margins is not currently a significant contributor to inflation”.
“The majority of the increase in prices has resulted from increases in labour costs” while “the contribution from corporate profits has only risen slightly over 2023”, the report said. The bank found that the trend was broadly consistent with evidence based on companies’ self-reported margins.
In May, Jonathan Haskel, who sits on the central bank’s Monetary Policy Committee, said in a speech that his “reading of official UK inflation data is that the contribution of rising business profits to recent inflation is small”.
Other economists offer a similar reading of the data. Ruth Gregory, deputy chief UK economist at the consultancy Capital Economics, said Thursday’s data suggested that companies “had been able to maintain their margins, despite the fact that input costs have risen and economic growth has been weak”.
“Crucially, though, this does not support the accusation that companies have expanded margins and thereby fuelled inflation,” she said, adding: “In aggregate, firms appear to have protected their margins, not padded them.”
While continuing to fall from a 40-year high of 11.1 per cent in October last year, inflation of 6.8 per cent is still more than three times the BoE’s 2 per cent target. Food inflation also declined last month but remained in double digits at 14.8 per cent.
Sharp rises in grocery costs earlier this year led the UK government to consider introducing voluntary price caps, with the competition watchdog warning retailers against food price profiteering.
Thursday’s data showed that, excluding companies operating in the North Sea, the net rate of return on capital recovered to 10.2 per cent in the three months to March from 9.6 per cent in the previous quarter on the back of falls in wholesale oil and gas prices. That figure was, however, still below the 2014-19 average of 11.4 per cent.
The average net profitability of UK companies operating in the North Sea, which soared after Russia’s invasion of Ukraine triggered an energy price shock, declined for the second consecutive quarter to 5.7 per cent.
That was 7 percentage points lower compared with the three months to December 2022, and the lowest reading since the three months to June 2021.
The rate of return of both manufacturing and services companies improved in the first quarter compared with the previous three months, but both remained below pre-Covid levels.
Manufacturing’s net rate of return of 8.8 per cent in the three months to March compared with a peak of 18.1 per cent registered at the end of 2017.
