Proactive Investors - Shell PLC (LON:SHEL), Exxon Mobil Corporation (NYSE:XOM) and Glencore PLC (LON:GLEN) are among the big corporations accused of raking in profits over and above the rate of inflation in the aftermath of Russia’s war on Ukraine.
A new report by the Institute for Public Policy Research has accused corporates of making ‘excess profits’, which in turn drove inflation higher.
By the end of last year, ExxonMobil and Shell’s annualised profits had risen to £53 billion and £44 billion, respectively, up from just £15 billion and £16 billion before the pandemic.
Food giants such as Kraft Heinz Co (NASDAQ:KHC), Bunge Ltd and Archer Daniels Midland have also had a profit hike in recent years.
According to the report, large international companies such as these increased their prices during a period of already high inflation, protecting or even driving up their profit margins, while real income fell.
Excess price rises had a knock-on effect by driving up consumer costs, and so “exacerbated the initial price shock”, the report said.
In the UK, 90% of nominal profit increases during this period occurred in only 11% of publicly listed firms, the IPPR said on Friday.
The researchers proposed a windfall tax on corporate profits to generate US$100 billion of tax revenue to tackle 'excess profits', in addition to market price caps.
It said price caps were applied in half of European economies in the past two years and helped to lower inflation in those countries.
The IPPR said inflation peaked higher and lasted longer due to corporations putting up their prices unnecessarily high.
Firms across sectors such as technology, telecommunications, and finance also made higher gains.
The report accuses companies of not only protecting their profit margins, but increasing them – and generating ‘excess profits’.
Carsten Jung, senior economist at IPPR, said: “Our research finds that markets aren’t working efficiently, enabling large companies to make profits that likely amplified inflation. This has made the cost of living crisis worse for most people, and for many smaller firms across the economy.
“We should be scrutinising the role profits have played in amplifying inflation. Tackling excess profits also matters for our economic efficiency.”
Academic researcher Isabella Weber, an assistant professor at the University of Massachusetts, has argued that profits in systemic sectors can have an outsized impact on inflation across the wider economy.
IPPR and Common Wealth researchers carried out an analysis of corporate profits, examining financial statements of 1,350 companies listed on the stock markets in the UK, US, Germany, Brazil and South Africa.
What they found was that nominal profits were at least 30% higher on average by the end of the fourth quarter of 2022, compared to the end of 2019, before the Covid-19 pandemic.
The companies with the biggest profit hikes, according to the study, were ExxonMobil, Shell (LON:RDSa), Glencore, Archer-Daniels-Midland and Kraft Heinz.
By the end of last year, oil company profits were far in excess of what they had been before the pandemic.
ExxonMobil’s annual profits rose to £53 billion over the period, up from £15 billion before the pandemic. Shell’s profits surged to £44 billion, up from £16 billion on an annualised basis.
Glencore’s annualised profits hiked to £14.8 billion, up from just £1.9 billion before the pandemic.
Kraft Heinz meanwhile had a jump in profits to £1.8 billion up from £265 million, according to the report.
While for many companies, the researchers said higher profits were the result of passing on higher costs to consumers, they said there is evidence that some stock market-listed firms not only protected their margins but also increased them.
This had the effect of not only passing inflation on to consumers, but further amplifying it.