The contribution of profits and production costs to price changes in the Polish economy

Michał Gradzewicz

No 370, NBP Working Papers from Narodowy Bank Polski

Abstract: A recent discussion on the sources of inflation rise in the period 2022- 2023 highlights the role of non-labor components of GDP deflator, calling them profits. The aim of our analysis is to measure profits more carefully, separating them from the cost of capital and to assess their contribution to changes of different measures of prices in the economy. We show that material costs (and especially the prices of materials) are the most important source of variation of gross output deflator, responsible for over 50% of its variance in the period 1997-2022. The role of profits in general, and after the pandemic in particular, differs between various price measures. They are contributing high to the increases of value added deflator in the period 2021-2023, whereas their contribution to gross output deflator is muted. Labor costs (of which wages are relatively more important than unit efficiency of hours) are an important contribution to both output and value added deflators. The contribution of capital is less important, with a more balanced contributions of capital price and unit efficiency. Moreover, we stress that the most attempts to assess the role of profits in the evolution of prices are based on approximate decompositions. We show that the contributions calculated without the approximation error indicate a lower, although still significant, contribution of profits to price increases in the period 2021-2022. We also present how the cost (or profit) components correlate with prices and we highlight the differences in the role of various components across industries.

Keywords: profits; capital costs; rental costs of capital; capital share; sources of inflation (search for similar items in EconPapers)
JEL-codes: D24 E01 E22 E31 (search for similar items in EconPapers)
Pages: 40
Date: 2024
New Economics Papers: this item is included in nep-eec and nep-mac
Note: The views expressed herein are those of the author and have not been endorsed by Narodowy Bank Polski. I would like to thank Grzegorz Wesołowski for valuable help and the discussion on the measurement of capital costs; and participants of the seminars at Narodowy Bank Polski and SGH Warsaw School of Economics for comments and discussions.
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Persistent link: https://EconPapers.repec.org/RePEc:nbp:nbpmis:370

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