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Workers are seen on strike on a picket line outside a Metro grocery store in Toronto, on July 29.Cole Burston/The Canadian Press

Corporate markups had little impact on inflation in Canada over the past three years, according to new research by economists at the Bank of Canada that challenges the notion that runaway prices were driven by business profiteering.

The paper, published Tuesday, found that markups – the difference between the production cost of a good or service and its selling price – rose early in the COVID-19 pandemic. However, the growth in markups slowed in 2021 and declined in 2022 as inflation soared to a four-decade high.

“Our estimates suggest that markup growth accounted for less than one-tenth of inflation in 2021. Furthermore, by 2022, when inflation reached its highest levels in recent history, growth in markups was near zero or negative,” wrote Bank of Canada researchers Panagiotis Bouras, Christian Bustamante, Xing Guo and Jacob Short.

“The fact that markup growth was not aligned with the dynamics of inflation indicates that the recent rise in inflation was driven primarily by changes in costs rather than by firms leveraging their market power to increase prices,” they wrote.

The research lands in the middle of a thorny debate about the sources of inflation. Some left-leaning economists and politicians, notably NDP leader Jagmeet Singh, have blamed inflation on opportunistic corporate price-setting behaviour – so-called greedflation. And companies such as Loblaw Cos. Ltd. L-T and Metro Inc. MRU-T have drawn intense political and public ire for reporting bumper profits at a time when prices are rising fast.

Corporate profits and profit margins certainly rose in 2022 at the same time inflation was running hot. However, economists debate the causality. Are profits high because prices are rising? Or is it the other way around?

Canadian oil and gas companies, for example, greatly benefited from rising global oil prices, but they were not the ones driving up those prices.

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The Bank of Canada staff working paper – which does not represent the official view of the central bank – tries to answer this question by analyzing financial statements of private companies, captured in Statistics Canada’s Quarterly Survey of Financial Statements.

The researchers found that company markups grew considerably in 2020, as their cost of sales dropped faster than their actual sales during the early pandemic lockdowns. However, by the time inflation began to take off in 2021, the growth in markups was decelerating, and continued to do so through 2022.

“The timing suggests that while changes in markups may have contributed to the initial rise of inflation in 2021, their contribution dissipated by the end of 2021 and growth in marginal costs was the driving force of peak inflation,” the researchers wrote.

“Inflation during 2021 was 5.1 per cent, whereas markup growth was only 0.44 per cent over the same period,” they wrote.

A separate paper by another team of Bank of Canada researchers, published in June, came to a similar conclusion by looking at the financial statements of publicly traded companies. It determined that “firms were able to fully pass higher costs through to the prices they charged their customers” but that there was “little evidence of rising markups amplifying the inflationary impact of rising costs.”

Meanwhile, researchers at Statistics Canada found a similar result in a paper published in June. They determined that markups from non-financial businesses, excluding oil and gas companies, increased by 2.6 per cent from 2018 to the middle of 2022. By contrast, consumer price inflation, excluding energy, was 10.5 per cent over the same period.

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David Macdonald, a senior economist with the left-leaning Canadian Centre for Policy Alternatives, said that the new Bank of Canada analysis puts too much emphasis on the Consumer Price Index as the sole metric of inflation in the economy. If you look at the GDP Deflator – a broader measure of price changes – it tracks more closely with the growth of corporate markups, he said.

Moreover, the debate about the causes of inflation are, to a certain extent, separate from the questions about the appropriate policy responses, Mr. Macdonald said.

“No one disagrees on the big sectors that benefited here: oil and gas, mining, banking … The disagreement potentially is on whether they had the power to force those surpluses or whether those surpluses happened, despite their best efforts, or irrespective of their efforts,” he said in an interview.

“One of the policy implications is that if industries are ending up with much higher profits, and those profits are the result of inflation, and they did nothing to earn those profits except being in the right place at the right time, that is exactly the type of thing that a corporate surtax should apply to,” he added.

The Bank of Canada’s top officials have tended to avoid the greedflation debate. But they have begun noting how competitive pressures tend to weaken in high-inflation environments, such that companies feel emboldened to pass on rising costs to consumers. Governor Tiff Macklem has said that corporate price-setting behaviour needs to normalize for inflation to return to the central bank’s 2-per-cent target.

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