It’s no secret that inflation has hit Europe across nearly every sector over the past year, driving up the costs of food, energy usage, technology and more.
Over the past several months, the European Central Bank has raised interest rates by the most in four decades, the idea being that higher prices cold force up wages and lock the EU into an inflationary spiral.
But 26 members of the ECB came to grips with a new macroeconomic reality at a recent retreat in Finland — profit margin is increasing, too.
That shouldn’t be the case when input costs rise suddenly. It means companies are using inflation to justify price hikes and passing those costs along to consumers.
The ECB policymakers received a presentation that changed their perspective on the corporate impact on inflation, according to reports, but the price hikes haven’t exactly been hidden.
Last week, Danone (OTCQX:DANOY) became the latest company to announce that price increases are likely this year, even after the Evian and Actimel producer made its biggest hikes in four decades in 2022.
In fact, two-thirds of the company's cost increases were passed on to consumers last year, the company said.
Similarly, Reckitt Benckiser benefit announced plans Thursday to lift its dividend by 5% thanks to ongoing price increases.
The company’s revenue rose 9.2% to £14.45bn in 2022, due in no small part to a 9.8% increase in price/mix, even as sales volumes declined in the fourth quarter.
"It's clear that profit expansion has played a larger role in the European inflation story in the last six months or so," said Paul Donovan, chief economist at UBS Global Wealth Management, as reported by Reuters. "
The ECB has failed to justify what it's doing in the context of a more profit-focused inflation story."
The question is what the ECB will do about it, starting with its next meeting on March 16. The bank is expected to raise rates to their highest level since the financial crisis in 2008, but this corporate juicing of the inflationary landscape could lead to a more dovish approach.
The conventional wisdom is that rising corporate margins tend to naturally fall as companies move to protect their market share amid rising prices.
But, if margins are a primary concern, the ECB could perhaps opt for a more dovish approach.
Contact Andrew Kessel at andrew.kessel@proactiveinvestors.com
Follow him on Twitter @andrew_kessel