Corporate Margins And Inflation During The Post Covid-19 Period In The Euro Area

This paper contributes to the debate on the role of corporate profits in the recent inflation episode, stirred by the significant increase in firms’ unit profits and the profit share in 2021, well above historical levels. Although these two variables declined in 2022 in most sectors, they remained above pre-COVID-19 levels in 2023, approaching preCOVID levels only in 2024. The elevated profits in the post COVID-19 period resulted from a mostly temporary phenomenon reflecting higher input cost-inflation rather than more structural factors including weak competition. There is no compelling evidence that certain firms might have taken advantage of relative price signals being blurred by higher inflation in 2021-22 to exploit their competitive position and increase their markups more than during other (non-accelerating inflation) times. Consistent with previous studies, it is found that firm-level markups increased in the euro area between 1995 and 2023, with the increase being mainly driven by firms with the highest markup. However, these markups increased less during the 2020-2023 period than on average over the whole estimation period. The estimated markups show procyclical behaviour (rising with productivity) and decline with the cost of goods sold (a measure of variable costs). This suggests that firms increase markups when they become more efficient, but lower markups to accommodate higher cost of production for example to maintain competitiveness. Capital expenditures, and spending on R&D are also found important drivers of markups, suggesting that firms with greater innovation, efficiency and investment have higher markups.