Paul Donovan: UBS chief economist unwraps profit-led inflation

<p>If you're looking for profit-led inflation you should probe consumer facing industries rather than look across the whole economy, says UBS chief economist Paul Donovan.</p><p>Speaking in the <a href="https://www.interest.co.nz/of-interest-podcasts" target="_blank"><i><strong>Of Interest podcast</strong></i></a><i>,</i> the London-based Donovan says profit-led inflation, whereby companies are able to expand profit margins and convince customers it's fair to do so, is the third wave of inflation experienced in developed economies since the Covid-19 pandemic. It follows a demand shock as developed country economies reopened and consumers had a "stockpile of savings" they spent on durable goods such as furniture, electronics and cars, and an energy supply shock after Russia invaded Ukraine, energy prices surged and demand reduced.</p><p>"What it [profit-led inflation] has really done is prolong the inflation. If we had not had the war in Ukraine I don't think we'd have got the profit-led inflation because Ukraine has been an important part of the story that companies have told to convince people to accept higher prices. I think if we hadn't had the war in Ukraine we would be sitting here talking about falling prices today," Donovan says.</p><p>"Right now we're starting to see profit-led inflation be challenged in a number of countries. But I'd say that it has probably accounted for about half of the inflation that we've experienced over the last six-to-eight months."</p><p>Lobby group Business NZ <a href="https://www.interest.co.nz/business/122469/business-nz-commissioned-report-says-nz-businesses-arent-using-inflation-cover" target="_blank"><strong>issued a report </strong></a>itcommissioned from consultants this week on profit-led inflation, or "greedflation" as it put it, saying it was "an imported narrative not supported by the evidence." Looking at data from 14 industries over the three years to December 2022, the report said 71% of price increases came from input costs, 15% labour costs and 14% gross profit