Bouras, Bustamante, Guo & Short (2023): The Contribution of Firm Profits to the Recent Rise in Inflation

Summary

"The contribution of firm profits to the recent rise in inflation" is Bank of Canada Staff Analytical Note 2023-12 (DOI 10.34989/san-2023-12), last updated August 1, 2023, authored by Panagiotis Bouras (Economic and Financial Research Department), Christian Bustamante and Jacob Short (Financial Stability Department), and Xing Guo (Canadian Economic Analysis Department), all affiliated with the Bank's Heterogeneity Laboratory. Staff analytical notes are explicitly non-authoritative: the note itself states it may "support or challenge prevailing policy orthodoxy" and that views are "solely those of the authors" and not attributable to the Bank of Canada. The PDF was fetched and read in full (10 pages) directly from the Bank of Canada's own hosting. The note directly tests the "greedflation" hypothesis — that firms used market power to raise prices faster than costs during 2021-22 — against Canadian firm-level data, and its answer is cautious and largely negative.

The Core Argument / Findings

Method. The authors measure firm-level markups (the ratio of price to marginal cost) using Statistics Canada's Quarterly Survey of Financial Statements (QSFS), covering a broad, representative sample of private non-financial incorporated businesses in Canada, 2018-2022. Because the data provide total costs and total sales rather than separately observed prices, quantities, and marginal costs, they proxy markups using the ratio of sales to cost of goods sold — a standard approach in this literature, explicitly following De Loecker, Eeckhout & Unger (2020). Markup growth is computed as the sales-weighted average of industry-level markup growth rates (the QSFS is publicly available only at industry aggregation), compared quarter-by-quarter against CPI inflation from Q1 2018 to Q4 2022.

Headline finding: markup timing does not match inflation timing. The authors find markups did grow after the onset of COVID-19 — but the growth was concentrated in 2020, a year of low inflation, not 2021-22 when inflation actually surged. Markup growth began declining in 2021 as inflation accelerated, and by 2022 — when Canadian inflation reached its highest levels in decades — markup growth was "near zero or negative." Their central quantitative estimate: markup growth accounted for less than one-tenth of inflation in 2021, and essentially none of the further acceleration into 2022. The paper's own conclusion states plainly: "The data do not necessarily support the notion that the recent high inflation is a consequence of firms leveraging their market power to increase their prices through higher markups."

Why markups rose in 2020 without causing inflation. The authors attribute the 2020 markup spike to a cost-driven mechanism, not a pricing-power mechanism: firms' costs (particularly variable costs — labour, intermediate inputs, utilities) fell faster than their sales during pandemic-related restrictions, mechanically raising the sales-to-cost ratio even without firms raising prices aggressively. They interpret the subsequent pattern — markup growth fading to zero/negative just as inflation took off — as consistent with forward-looking price-smoothing behaviour: firms anticipating future cost increases (supply-chain disruption, rising input and wage costs — corroborated by Bank of Canada Business Outlook Survey data cited in the note showing firms expected large input/output price and wage increases in 2021) raised prices gradually in advance rather than waiting to pass through realized cost shocks all at once, which compresses markup growth even as headline inflation rises.

Corroboration cited. The note cites a companion Bank of Canada note (Bilyk, Grieder & Khan 2023, SAN 2023-8) and a Federal Reserve Bank of Kansas City study (Glover, Mustre-del-Rio & von Ende-Becker 2022/2023) finding "similar patterns in markups and inflation for the United States," framed as supporting the same forward-looking-pricing interpretation rather than a market-power-driven one.

Relation to the Georgist Case

This note is squarely relevant to the wiki's corporate-profits-increasingly-rents claim, but the relevance runs mostly as a caution against overextension, not as support. The claim on that page concerns a long-run, multi-decade rise in US markups and pure-profit share (De Loecker, Eeckhout & Unger's ~21% to ~61% markup rise, 1980-2016) — a slow structural trend. The Bank of Canada note is a short-run, episode-specific test of whether markup growth (the acceleration, not the level) explains the 2021-23 Canadian inflation spike specifically, and its finding is that it largely does not. These are different questions on different timescales using different data, and the note should not be read as either confirming or refuting the longer-run corporate-rents literature: a firm can hold an elevated level of markup (consistent with the rent-share literature) while its quarter-to-quarter growth explains little of a particular inflation episode (consistent with this note). The task brief's caution applies directly here: this is exactly the kind of cautious central-bank staff finding that should not be pulled into the profit-rent narrative — if anything, it is evidence that Canadian policymakers' own internal analysis in 2023 pushed back against the "sellers' inflation"/profit-driven story for that specific episode, even while remaining agnostic about the separate question of whether markup levels are elevated for structural reasons.

Nuances and Limits

The sales-to-cost-of-goods-sold proxy for markups is standard but imperfect: it assumes marginal cost is a constant proportion of observed accounting cost, and publicly available QSFS data are aggregated to the industry level, so firm-within-industry heterogeneity in pricing power is not visible — a companion check using Compustat data suggests most markup variation is across industries rather than within them, but that check is itself limited to publicly listed firms. The note excludes financial firms and utilities, so it says nothing about markups in finance, insurance, or real estate — it does not bear directly on the wiki's FIRE sector claims. It covers only 2018-2022 and Canada, not US inflation or later years. The authors are explicit that 2021 markup growth was "positive but declining" and still made a "mild" contribution — the finding is "markups explain little," not "markups explain nothing," and should be cited with that precision.

Later Statistics Canada work checked (2026-07-17): corroborates rather than revises. Hassan Faryaar, Danny Leung & Alexandre Fortier-Labonté (2023), "Markups and inflation: Evidence from firm-level data," Statistics Canada Economic and Social Reports (the paper this note's own references point to), independently finds aggregate Canadian markups (non-financial businesses excluding oil/gas) rose 2.6% from pre-pandemic (2018-2019) to Q2 2022 — "a relatively small increase" against 10.5% CPI-ex-energy inflation and 19.4% GDP-deflator growth over the same window — and concludes markup growth "does not appear to be the main driver" of the episode, i.e., the same direction and rough magnitude as the Bank of Canada note, not a revision of it. A companion StatCan piece, Faryaar & Leung (2023), "Inflationary pressures, wages and profits," finds unit labour costs and unit non-labour costs contributed roughly equally to 2019-2022 GDP-deflator growth (48.3% vs. 51.7%), and that the non-labour share reflects rising interest and depreciation costs as well as profits — corroborating rather than overturning the "cost-driven, not markup-driven" read. No Bank of Canada or Statistics Canada publication found (as of 2026-07-17) revisits or revises the specific 2021-23 finding. The nearest later, longer-horizon StatCan work — Hassan Faryaar (2025), "Estimating Markups Using Firm-Level Data: A Comparative Analysis," Analytical Studies Branch Research Paper Series No. 480 — covers 2001-2019 (ending before the inflation episode) and finds markups rose gradually over that longer span (1.12 to 1.18, +5.3%, using the wage-bill cost measure) alongside a rising profit share (9.2% to 13.2% of output) and falling firm-entry rates; it is a different-scope, levels/methods paper, not a test of the 2021-23 inflation episode, so it neither confirms nor revises this note's finding — but it is relevant context for the wiki's separate long-run corporate-rents literature (see Relation to the Georgist Case, above).

Bears On

• Problem: Corporate profits increasingly reflect economic rents — a cautionary, short-run counterpoint from a central-bank staff analysis: Canadian markup growth explained under one-tenth of 2021 inflation and was flat-to-negative by 2022, evidence that a specific inflationary episode was cost-driven rather than markup-driven, without bearing on the separate long-run markup-level claim the page documents.
• Concept: Economic Rent — a data point illustrating the empirical difficulty of attributing a specific price episode to rent-extraction versus cost pass-through, reinforcing the wiki's general caution against over-reading "excess profits" claims into any given inflationary period.
• Research: Hebous: Excess Profit Taxes — companion policy-design literature on taxing windfall/excess profits; this note's finding that 2021-22 Canadian profit growth was largely cost-driven rather than markup-driven is a relevant scope caution for excess-profits-tax proposals justified by "pandemic/inflation windfalls" specifically.

See Also

• Corporate profits increasingly reflect economic rents
• Economic Rent
• De Loecker, Eeckhout & Unger (2020): The Rise of Market Power
• Objection: Taxing Quasi-Rents Kills Innovation
• Canada

Sources

1. Panagiotis Bouras, Christian Bustamante, Xing Guo & Jacob Short (2023), "The contribution of firm profits to the recent rise in inflation," Bank of Canada Staff Analytical Note 2023-12, last updated August 1, 2023. DOI: 10.34989/san-2023-12 · PDF — used for the full text: methodology (QSFS sales-to-cost markup proxy), the headline finding that markup growth explains less than one-tenth of 2021 inflation and was near zero/negative in 2022, the cost-driven explanation for the 2020 markup spike, and the price-smoothing interpretation.
2. Jan De Loecker, Jan Eeckhout & Gabriel Unger (2020), "The Rise of Market Power and the Macroeconomic Implications," Quarterly Journal of Economics 135(2) — cited in the Bank of Canada note as the methodological source for the sales-to-cost markup proxy; already a wiki research page — used here only to confirm the shared methodology, not independently re-read in this pass.
3. Andrew Glover, Jose Mustre-del-Rio & Alice von Ende-Becker (2023), "How Much Have Record Corporate Profits Contributed to Recent Inflation?", Federal Reserve Bank of Kansas City Economic Review 108(1): 1-13 — cited in the Bank of Canada note as a US study finding a similar markup/inflation timing mismatch; not independently fetched in this pass, cited only as referenced by source 1.
4. Hassan Faryaar, Danny Leung & Alexandre Fortier-Labonté (2023), "Markups and inflation: Evidence from firm-level data," Statistics Canada, Economic and Social Reports, Catalogue no. 36-28-0001. Article — fetched 2026-07-17; used for the independent 2.6% markup-growth figure (2018-19 to Q2 2022) and the finding that markup growth explains a modest, not dominant, share of the 2021-23 inflation episode, corroborating rather than revising source 1.
5. Hassan Faryaar & Danny Leung (2023), "Inflationary pressures, wages and profits," Statistics Canada, Economic and Social Reports, Catalogue no. 36-28-0001. Article — fetched 2026-07-17; used for the near-equal labour/non-labour cost decomposition of 2019-2022 GDP-deflator growth.
6. Hassan Faryaar (2025), "Estimating Markups Using Firm-Level Data: A Comparative Analysis," Statistics Canada, Analytical Studies Branch Research Paper Series, Catalogue no. 11F0019M, no. 480. Article — fetched 2026-07-17; used only to establish that the nearest later StatCan markup study covers 2001-2019 (a longer-run levels/methods question) and does not test the 2021-23 inflation episode.