The laughable Bank of Canada report even includes the line
Why did this increase in markups not contribute significantly to inflation? We show that markup growth reached its highest level because of a contraction in firms’ costs […] during the pandemic-related public health interventions
So when their costs go down they keep the prices the same and pocket the difference, BoC report verdict “profit growth without inflation”. So what happens when costs go back up?
We observe a mild contribution of markup growth to inflation in 2021, partially explained by demand rebounding faster than costs. However, the fact that markup growth fell to zero the following year indicates that firms were likely smoothing out their price increases […] rather than leveraging increases in market power.
So when the costs go back up, they pass 100% of the cost to the consumer and keep their new higher profit margins (no change in markup). BoC verdict “the inflation has nothing to do with profit growth”. Amazing!
If industry follows this “price ratchet” mechanism profit margins can go to infinity “without causing inflation” according to BoC. Absolutely galaxy brain levels of economic genius.
They really think we’re idiots.
This report is an insult to your intelligence, Canucks.
I think it’s ridiculous that the presumption that prices have stabilized means that costs have fallen and the companies are pocketing the difference. They probably are pocketing the difference, but there’s no evidence to say that it’s actually a significant amount. This author suggests that the companies’ costs have probably plummeted by a good 20-50% or something and isn’t passing that along when their costs probably only dropped by like 5%, an amount that virtually nobody would notice if the end prices have actually fallen.
I’ve noticed that several beers have fallen in price these last few months(hell, some have dropped in the last two years), yet nobody has ever mentioned it once. I know a guy who works with beer, and he told me that he hasn’t noticed any changes in spending habits regarding the changes in prices going down. Only when the prices go up do people notice.
There are definitely issues in the supply chain caused by a lack of competition, but this isn’t remotely a new thing, nor is recent phenomena evidence that the prices is especially worse now than it was ten years ago. Blaming the BoC for doing their job isn’t the solution, but actually identifying specific issues and proposing workable changes is how to make things better, not having a tantrum like a man-baby.
That’s not what I said. That’s also not what the report said. You’re arguing with yourself at this point.
The report says at the beginning of covid costs dropped, but prices didn’t, with the difference going to profits. Then when costs went back up prices went up maintaining the existing profit margins. That’s a “price ratchet” and you can easily figure out what happens after a few cycles. Somehow the bank of Canada concluded this isn’t a factor in inflation because they looked at both parts of the price ratchet separately instead of together.
