Companies in Trade, Agriculture, and Construction in Germany Used Inflation to Increase Profits

Higher prices for energy and inputs alone do not explain the extent of inflation in Germany. “Rather, companies in some sectors of the economy appear to have used the price increases to expand their profits. This is especially true in trade, agriculture, and construction,” says Joachim Ragnitz, Managing Director of ifo Dresden. This was suggested by data from official statistics on economic performance, used by ifo to determine differences between nominal and price-adjusted value added. This allows conclusions to be drawn about price increases that were not caused by higher input costs.

“Following the Covid-19 pandemic, private households had accumulated large savings. These were drawn down in the course of 2022, fueling consumer demand,” Ragnitz says. “Government relief is also likely to have helped support demand, thereby offering greater room for price increases.”

“Particularly in agriculture and forestry, including fisheries, in construction, and in trade, hospitality, and transport, companies raised their prices much more than would have been expected on the basis of higher input prices alone,” Ragnitz adds. “Some companies seem to be using skyrocketing costs as an excuse to improve their profit situation, too, by increasing their sales prices.”

Ragnitz suggests it is likely that while farming businesses were still using up their existing stocks of fertilizer and feedstuffs, their price calculations had already factored in expected increases for restocking. In construction, imbalances between supply and demand are likely to have contributed to the particularly sharp price increases. This applies above all in certain conurbations.

He adds that the only remedy for excessive price increases is more competition. This would enable consumers to buy cheaper products, dampening profit inflation.
Ragnitz says there is no reason for government intervention in prices. Meanwhile, an excess profits tax would neither be in line with the market, given its distorting effect on the market’s scarcity signals, nor legally enforceable. Since there is no evidence that the companies are colluding to increase prices, antitrust measures are of no use either.

Fighting inflation is primarily a task for the European Central Bank, Ragnitz says. The government could help reduce inflation by foregoing broad-based relief for the benefit of all households and limiting policy measures to particularly poor households.