Inflation: decomposition into profits, unit costs

For the non-financial corporate business sector, using the price per unit of real gross value added.

Picture 1: Quarterly price inflation of gross value added (black line), contribution of unit labor costs (blue bar), unit non-labor costs (brown), and profits (green). Peak-to-trough dates as determined by the NBER are in grey. Source: BEA 2023Q1, 2nd Edition, Table 1.15, NBER and author’s calculations.

Note that from an accounting perspective, earnings have increased significantly against the gross value added price level in some quarters (e.g. Q3 2020, Q1-2 2021) and subtracted in others (e.g. Q4 2021). 2020)

The price of real gross value added for the nonfinancial corporations sector is usually not a deflator. It is useful to compare with the CPI and PCE deflator.

Figure 2: Quarterly price inflation of gross value added (black line), CPI (blue), PCE deflator (yellow). Peak-to-trough dates as determined by the NBER are in grey. Source: BEA 2023Q1 2nd edition, Table 1.15, BLS and BEA via FRED, NBER and author’s calculations.

What is the cumulative impact since the start of the pandemic? This is shown in Figure 3.

Figure 3: Cumulative growth in the price of gross value added (black line), combined contribution of unit labor costs (blue bar), unit non-labor costs (brown) and profits (green), all relative to the first quarter of 2020. Peak-to-trough dates as determined by the NBER are in grey. Source: BEA 2023Q1, 2nd Edition, Table 1.15, NBER and author’s calculations.

Note that labor costs are specifically unit labor costs; therefore, they include changes in performance.

The figure shows that while corporate profits are not inconsequential in raising the price level, they are in fact smaller—in proportion—to labor costs.

Update from 06/05/2023:

Andy Glover draws my attention to it FRBKC Analysis which is more extensive and discreet than mine!

Source: FRBKS (2023).