Did corporate profits or wages cause the recent inflation spike?
The clearest evidence comes from a 2023 IMF study of the Eurozone, which found that domestic profits accounted for 45% of the increase in the consumption deflator (a broad measure of inflation) between early 2022 and early 2023 [3]. In contrast, import prices—driven by energy and supply shocks—accounted for 40%, and wages played a smaller role. This means that firms, on average, passed on more than their own cost increases to consumers, boosting their profit margins and fueling inflation.
A 2023 study on US inflation during COVID-19 reached a similar conclusion, calling it a 'sellers’ inflation' [1]. The researchers showed that large firms with market power used supply bottlenecks and cost shocks as cover to raise prices and increase profits. Labor only entered the picture later, trying to catch up with lost purchasing power—meaning wage growth was a response to inflation, not its initial cause.
How do companies actually drive inflation through profits?
The mechanism is not about all firms, but about those with market power—companies that can set prices rather than just take them. The 2023 US study describes a three-stage process [1]: First, a shock (like higher energy costs or a supply bottleneck) hits upstream sectors, creating windfall profits. Second, downstream firms—to protect their margins—propagate or even amplify those price increases, especially if they face little competition. Third, workers eventually demand higher wages to keep up, which can create a self-sustaining spiral if not checked.
A 2023 study on Spain confirms this pattern [2]. It found that while the government took strong measures to cap energy prices, firms still passed on higher costs to consumers while maintaining or increasing their profit margins. The result was an unequal burden: wage earners bore the brunt of inflation because their pay did not keep pace, while corporate profits stayed high.
When does wage growth become a real inflation driver?
Wage growth can cause inflation, but it depends on the economic context. A 2021 study of 27 European countries over 25 years found that historically, wage growth did lead to higher inflation—but the effect weakened significantly after the 2008 financial crisis [4]. The pass-through from wages to prices was much lower when inflation expectations were subdued, when competitive pressures were high, and when corporate profits were already robust.
This means that in the current environment—where profits are high and competition is limited—wage growth is less likely to spark inflation than it would have in the past. The 2023 IMF study adds a practical warning: if wages grow at around 4.5% per year (as seen in early 2023), bringing inflation back to target will require profit margins to shrink back to pre-pandemic levels [3]. In other words, the burden of disinflation may fall on corporate profits, not workers' paychecks.
Sources used in this answer
Sellers’ inflation, profits and conflict: why can large firms hike prices in an emergency?
US COVID-19 inflation was primarily a 'sellers’ inflation' driven by firms with market power raising prices, not by wage growth; labor only responded later to defend real wages [1].
Inflation and counter-inflationary policy measures: The case of Spain
In Spain, firms passed on higher costs to consumers while maintaining or increasing profit margins, causing wage earners to bear the brunt of inflation [2].
Euro Area Inflation after the Pandemic and Energy Shock: Import Prices, Profits and Wages
In the Eurozone from 2022-2023, domestic profits accounted for 45% of inflation, import prices for 40%, and wages played a smaller role; firms passed on more than their cost increases [3].
Wage growth and inflation in Europe: a puzzle?
Historically, wage growth in Europe did lead to higher inflation, but the effect weakened after 2008, especially when profits were high and competition was strong [4].