Trends in profit margins

Quarterly Bulletin 1989 Q2
Published on 01 June 1989

Inflation, as measured by the twelve-month change in the retail price index (RPI) rose by over 3 percentage points between the first and fourth quarters of 1988-from 3.4% to 6.5%. Over the same period the rate of increase in manufacturers' output prices rose/rom 3.8% to 4.9%; and the GDP deflator from 4.9% to 6.9%. This increase in inflation has been attributed to a number of factors, but one widely-held view is that a significant element may be ascribed to the growth in company profitability, and in particular profit margins.

This article sets out the methodology underlying the calculations of the profit margins figures that have been used in regular reporting in the Bulletin, and presents a variety of measures which suggest that, economy wide, profits have contributed significantly to inflation. However, revisions to the manufacturing margins calculations in the light of new data on employment and productivity imply that the recent growth has been less rapid than previously thought and that, as a consequence, manufacturers' margins may stiff be below earlier peaks. An accompanying note presenting estimates of margins in a number of major overseas economies indicates that the growth of profit margins in the United Kingdom has not been an isolated development.

A final section suggests that competitiveness and capacity utilisation are important causes of developments in margins, but highlights the difficulties associated with explaining recent behaviour.

PDFTrends in profit margins

Other Quarterly Bulletin 1989 Q2 articles

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