For corporate profits, inflation is the gift that keeps on giving

The latest August inflation figure of four per cent is unabashedly bad news. It’s down from 8.1 per cent in June 2022, but that doesn’t mean prices are going down, it just means they aren’t going up quite as quickly.

The cost of the basics in life is what’s rising — mortgages, rents, gas.

On average, grocery prices didn’t rise this summer, but they’re still much higher than they were before inflation reared its ugly head and the political theatre of federal ministers meeting with grocery store CEOs is unlikely to change that reality.

If we look at food prices on a year-over-year basis, they’re up 6.5 per cent from last August, but food prices fell slightly (0.4 per cent) between July and August.

And there’s more bad news: four per cent isn’t good enough for the Bank of Canada. The bank is driven to bring inflation down to two per cent. And the only tool the bank has in its toolkit is a sledgehammer: raising interest rates. This can bring down the price of items we buy with debt — think: cars and houses — but it also drives up costs where interest is paid, like mortgage payments and rent.

The bank’s interest rate has gone from 0.25 per cent in February 2022 to five per cent today.

Those rate increases have turned up the heat on borrowers and are directly responsible for higher mortgage interest costs.

Builders have stopped building new housing, despite the critical shortage of affordable housing in Canada.

Landlords are taking their higher mortgage costs and pushing them onto tenants through increased rent in areas where there is little to no rent control. Year-over-year rent increases in August hit a 30-year high.

Further, Bank of Canada interest rates will only make this housing situation worse. Another higher inflation report will make an October rate hike increasingly likely.

High inflation and increasing interest rates ratchet up the threat of recession and job loss. And that’s where things go into a spiral called “stagflation.” Growth stops, job losses mount, but interest rates just go higher, pushing prices higher in some areas.

Gasoline prices, which rose in August, won’t be impacted by interest rate hikes because we don’t buy it with debt.

Food prices aren’t impacted by interest rate hikes because they’re also not debt-financed (at least, not yet).

A wise journalist recently asked me: If higher interest rates are driving inflation, doesn’t that mean it’s self-inflicted? Why yes, interest rates can drive inflation — something they don’t teach you in economics textbooks. But if interest rates go high enough, you cause a recession and then prices will fall.

The Bank of Canada is targeting the inflation rate. The labour market and the general economy are of secondary concern.

As inflation continues to plague Canadians, you’ll be glad to know that corporate Canada is continuing to convert those extra dollars you’re paying into profits. In the second quarter of 2023, profit margins remained close to their all-time highs in 2021 and 2022. Turns out, inflation is good for business if you’re selling cars or food.

Canada’s banks and finance companies saw a profit margin boom like never before during the reopening of the economy in 2021-22. Inflation converted right into profits. Now profit margins are at their pre-pandemic high.

When it comes to non-financial corporations, the inflation-profit party just keeps on going. Profit margins remain above anything experienced pre-pandemic. The best it ever was, pre-pandemic, was in 2017.

Profit margins are still above that point.

In the second quarter of 2023, grocery store giants had pre-tax profit margins of 4.3 per cent — an all-time high.

Between April and June 2023, they made $1.97 billion in pre-tax profits, more than in any other quarter in Canadian history. That’s right, at a time when food prices have never been higher, grocery stores have never made as much money.

Supply shortages mean that Canadians can't buy a new car even if they wanted to. But even if you could, it would cost you much more than it did a few years ago. You'll be glad to know that car dealers’ profit margins also just hit an all-time high, as did their profits, at $3.3 billion in the second quarter of 2023.

Corporate profiteering off of inflation is a feature, not a bug, of the system.

In my January 2023 report Where Are Your Inflation Dollars Going? I showed that four industries are dominating inflationary corporate profits. Of every dollar spent on higher prices in the last two years, 47 cents were converted into corporate profits in four industries, led by mining, oil and gas extraction.

Of every additional dollar spent on inflation, 25 cents went to profits in mining and oil and gas extraction, nine cents went to profits in manufacturing (which includes oil refining into gasoline and diesel), seven cents went to profits in real estate, rentals and leasing, and six cents went to profits in finance and insurance, which includes the big banks.

By far, the largest beneficiaries of inflation have been the oil and gas extraction and mining industries, which, in an era of climate change, is not what we want.

Inflation may seem like it's bad for everyone, but for corporate profits, it’s the gift that keeps on giving.

David Macdonald is a senior economist at the Canadian Centre for Policy Alternatives.