The surge in inflation in advanced economies has not been driven by a widening of firms’ profit margins. However, the fact that firms have been able to maintain profit margins in the face of rising costs means that inflation has been 2-3%-pts higher in advanced economies than would otherwise have been the case. For decades, higher input costs have squeezed firms’ profit margins. The fact that they have not done so in the past 18 months is due to an imbalance of demand and supply, which is the real cause of higher inflation.
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