How have unit profits contributed to the recent strengthening of euro area domestic price pressures? Prepared by Elke Hahn Published as part of the ECB Economic Bulletin, Issue 4/2023.

Profits are an integral component of output prices, just like production costs such as wages or the cost of intermediate inputs. Firms determine their desired profits by setting prices at a certain level in excess of costs in order to achieve remuneration on their capital. Developments in profits and wages, as captured by the GDP deflator, are important determinants of underlying inflation, as illustrated by the strong co-movement between the GDP deflator and indicators of underlying inflation such as the Harmonised Index of Consumer Prices (HICP) excluding energy and food, or HICP excluding energy (Chart A). This box analyses the impact that profits have had on domestic inflation on the basis of unit profits derived from the national accounts. It also looks at how profit indicators derived from institutional sector accounts, which are closer to business profits, have contributed to domestic inflation, and how the current signals from unit profits based on the national accounts fit together with the signals from mark-ups and profit margin indicators derived from corporate accounts.