Euro Area Inflation and how Import Prices, Profits, and Wages fit in

Corporate Profits as Major Driver of Inflation in Europe

Corporate profits, rather than labor costs, play a significant role in driving inflation in Europe. While import prices contribute to inflation, the research indicates that profits account for about 45% of average inflation, compared to 40% attributed to import prices. Real wages have been eroded, reducing purchasing power for workers, while profits have remained relatively stable. The research suggests that tight monetary policies are necessary to anchor expectations and restrict demand, ensuring that firms accept higher labor costs without increasing prices further.