The profit-price spiral in food and energy

Policy Study

The recent inflation episode in 2021-23 has exposed the vulnerability of the European economies to supply-side shocks and the inadequacy of existing monetary tools to deal with them. Moreover, companies used their monopoly power, amplified due to bottlenecks and supply disruptions, to reap abnormally high profits,  thus exacerbating the initial inflationary effects of the shocks. 

In this study, we focus on two systemically significant sectors – food and energy –  and show that companies in food and energy supply chains have reaped abnormally high profits during the 2021-23 inflation episode. Part of these profits are attributable to speculation on the commodity markets, in which the majority of food and energy companies engage. Another reason is monopolisation: food and energy markets are highly concentrated, with a handful of international companies controlling the trading and transportation of commodities. These companies are very loosely regulated, and data on their activities is only partially collected by regulators. 

The authors of the study assess the effectiveness of European policies to tackle energy price inflation. Our evidence suggests that countries which spent more on energy price controls had overall lower energy price inflation. The effectiveness of measures at the EU level to deal with energy price inflation was limited due to their late introduction. 

We argue that the EU needs to create a proper inflation governance framework that would involve not just ECB monetary policy, but a complex of measures on inflation preparedness, prevention, reduction and mitigation. We discuss some measures in more detail: price controls, income support, excess profit taxes, limiting speculation, increasing price transparency, building strategic reserves, and reducing fossil fuel dependency.