It's not just the US: Corporate profits are keeping inflation high in Europe too

• As inflation stays high around the world, some are increasingly blaming high corporate profits.
• Under "greedflation," companies pass along their costs to consumers and make money, too.

The economic downturn the world has been bracing for still hasn't arrived, labor markets are still booming, and yet the economy feels bad. You can blame inflation for that one — and how much money companies are making off of you.

It's what some economists have termed "greedflation," as companies have found that customers are willing to tolerate ever-increasing prices amid pandemic-era economic conditions like supply chain issues and scarcity. In that model, companies pass along their increased costs to consumers, and then still make additional profits on top of it.

And it's not just an American issue: Higher prices in Europe are largely powered by corporate profits, according to a new working paper from the International Monetary Fund, and profits need to normalize before prices can truly drop.

IMF researchers Niels-Jakob Hansen, Frederik Toscani, and Jing Zhou find that domestic profits in Europe account for a little under 45% of inflation in the Euro Area, while higher wages — which have been pointed to as a primary driver of inflation — account for just a quarter of inflation.

"The growing literature on the role for profits is generally aligned with our finding that firms have fared relatively better than workers even in the absence of a large increase in markups," the IMF authors write.

Inflation is not solely caused by soaring profits, but the working paper finds that profits rising well above pre-pandemic trends have made their mark on European inflation. According to the IMF research, both labor costs and profits rose "significantly" above their recent averages — but profits made up a greater part of that. In particular, industries like trade, food, and travel saw their profits skyrocket, and contribute more to rising costs.

And Europe might be worse off than the US when it comes to so-called "greedflation," as inflation in the states cools off and profits play increasingly less of a role in keeping costs high. The IMF analysis finds that profits are ultimately playing a larger role in European inflation than in the US and Canada. As the paper notes, that doesn't mean that firms are seeing a huge increase in profitability, but instead using higher profits and prices to buffer against higher costs coming in.

Factors like higher productivity — essentially firms getting more bang for their buck from their workers — has helped ease European inflation some through 2022, although productivity fell in the first quarter of 2023. To get inflation to where it needs to be in Europe, profit share would have to fall to its pre-pandemic average, the researchers found.

And high prices go beyond squeezing consumers' wallets; they're also powering what's been called a "vibecession." As Insider's Noah Sheidlower reports, Americans feel gloomy about the country's economic outlook, and that might be due in part to still-high prices.

"It's really not corporations who end up paying the cost in the end because when their costs go up, they can just push that back onto consumers with higher prices and protect their profit margins," Chris Becker, a senior economist and the associate director of policy and research at the Groundwork Collaborative, previously told Insider. "It's the consumers and the workers that really have ended up paying the cost for inflation."