Profit-led or cost-led inflation? Propagation effects through the EU inter-industry network

Giacomo Cucignatto (), Nadia Garbellini () and Facund Fora Alcalde ()
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Giacomo Cucignatto: Sapienza University of Rome, Italy
Nadia Garbellini: University of Modena and Reggio Emilia
Facund Fora Alcalde: Autonomous University of Barcelona and University of the Balearic Islands

PSL Quarterly Review, 2023, vol. 76, issue 306, 261-276

Abstract: The return of persistent inflation in OECD countries has been the most significant macroeconomic phenomenon in recent years. This article analyses different explanations for the current inflationary dynamics, from which various policy recommendations arise. Specifically, by using a Multi-Regional Input-Output (MRIO) model, the article investigates whether the rise in profits and profit share is the result of changes in the behaviour of firms or just the natural outcome of rising energy costs, in the case of France, Italy and Spain. Our results indicate that companies raised prices more than necessary in order to maintain their levels of profitability in each of the European economies analysed, confirming that inflation hikes were led by surging profits. This implies that the introduction or strengthening of price controls would help to rapidly bring inflation under control, protecting the purchasing power of households.

Keywords: inflation; input-output; profit-price spiral; price controls (search for similar items in EconPapers)
JEL-codes: C67 E31 E64 J30 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (3)

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