Companies are a lot more willing to raise prices now — and it's making inflation worse

Corporations are a lot more willing than usual to raise their prices lately, and it's putting more of the burden of high inflation on consumers.

That may not come as much of a surprise to anyone who has browsed a grocery aisle, kicked the tires at a car dealership or filled up a gas tank of late, but even the Bank of Canada is starting to take notice of the trend, as the central bank continues its battle to wrestle inflation into submission.

Speaking to a parliamentary committee in Ottawa this week, the bank's governor, Tiff Macklem, told lawmakers that the bank has noticed a troubling new trend coming out of the corporate sector.

For much of the past few decades, any time businesses have seen a jump in their input costs — the amount they pay for things like raw materials, energy and even workers — "they were pretty cautious about passing on [that cost into] the prices they charged for goods and services," Macklem said.

Their reasoning was simple: they were afraid of losing customers.

But in this bout of high inflation, the bank has noticed that corporations aren't nearly as worried about doing that as they typically are.

"When input prices have gone up ... those are getting passed through much more quickly to final goods prices. So households are bearing the full inflationary impact much more: that's what we can see pretty clearly in the data."

When asked how much of Canada's current inflationary problem can be blamed on price hikes above and beyond companies' cost increases, Macklem said, "I don't think we can put a number on it," but other central bankers have been far more willing.

In a speech this summer, Christine Lagarde cited data from the European Central Bank she leads showing that for the 20 years leading up to 2022, corporate profits were responsible for about one-third of inflation.

Last year, however, that ratio jumped to two-thirds, which means that despite legitimate increases in their cost of doing business, their take-home share of every consumer dollar effectively doubled. 

"Firms cannot continue to display the pricing behaviour we have recently seen," she said.

Paul Donovan, a London-based economist with Swiss bank UBS, says the scenario described above is what's known as "profit-led inflation" and he's been waving red flags about it for most of the past year.

While it has exposed itself to varying degrees in various places around the world, the one condition it requires is a strong narrative: consumers have to believe en masse that price increases are justified, or they won't accept them.

"Profit-led inflation works until it does not and the point where consumers start to rebel against profit-led price increases disguised as other factors tends to be a tipping point with a sharp turn," he told CBC News in an email.