Since inflation reared its head in 2021, workers and consumers have been attacked on multiple fronts. On average, workers have seen their real purchasing power eroded by prices outpacing wage growth. Meanwhile, the response to inflation from the Bank of Canada has in many ways exacerbated the cost-of-living crisis. Although interest rate hikes haven’t engineered the levels of unemployment many anticipated, they have nevertheless added cost pressures in the form of higher payments on debt, including mortgages.

Governments have largely failed to meaningfully act to cushion the blow of rising prices, let alone address the sources of the problem. This inaction has been all the more maddening in the face of what many have characterized as either “profit-push” or “cost-push” inflation. To put it simply, critics on the left have demonstrated throughout the inflationary crisis that corporations were imposing higher prices on workers and consumers. Some firms, moreover, were using inflation as an opportunity to increase profits.

Over the past couple of years, this argument has travelled from the fringe to the center of mainstream commentary. In July, we received additional confirmation that the “inflationary profits” explanation was largely correct.

At the end of the month, researchers at Statistics Canada (StatCan) published a report looking at the profitability of “key Canadian industries” from 2017 to 2022. Between the second quarters of 2021 and 2022, inflation exceeded the Bank of Canada’s upper band of 3 percent, averaging 6.8 percent in 2022 and peaking at 8.1 percent in the summer of that year. The new StatCan report offers a comprehensive look at the profitability of nonfinancial corporations in Canada from the years before the pandemic through the post-COVID inflation.

The report confirms what many analysts and commentators have already argued: energy and mining corporations registered the largest growth in profit margins during the inflationary surge. Because energy is a key input cost across the economy, these excess profits likely played a considerable role in overall inflation. As the report summarizes:

During the 12-month period preceding the second quarter of 2022, the rise in industry-wide margins were led by the energy and mining sectors where soaring prices fueled an increase in margins. The considerable impact of higher commodity prices, particularly energy, and supply chain disruptions that began at the onset [of] the pandemic persist across Canadian industries resulting in the current inflation rates.

However, beyond this, the report also shows that many industries actually recorded lower-than-average profit margins as their input costs grew but they were unable to pass price increases onto consumers. As the report notes:

Higher input costs being passed on to consumers in an inflationary context should lead to lower margins, all else remaining equal. Hence, lower margins across industries over the past years would be expected. Between the second quarters of 2021 and 2022, 49 [percent] of the industries covered by the [Quarterly Survey of Financial Statements] reported a decrease in margins.

What this tells us is that inflationary pressures were relatively concentrated in the energy and resource sectors, rather than being either a story of a general profit push or a wider problem of “overcapacity” or excess demand. In other words, a few select industries, mostly in the energy sector, were driving up prices.

Yet the Bank of Canada acted as though excessive demand, particularly in the form of an overly tight labor market, was the culprit. Instead of government targeting an inflation response at the source of the problem — for example through strategic price controls on energy, food, and other key inputs or, at minimum, by taxing away the excess profits of energy corporations — we got a central bank policy of interest rate hikes aimed at drawing demand away and undermining labor’s bargaining power.

We can now look at StatCan’s new numbers to illustrate the impacts of excess profit margins. The figure below tracks the economywide profit margins of nonfinancial firms between the first quarter of 2017 and the fourth quarter of 2022. It also shows the profit margins of the five most and five least profitable industries.

Total nonfinancial profitability declined following the onset of the pandemic, but then steadily recovered, thanks in part to the considerable aid provided by government. Total industry profit margins increased by half a percentage point during the 2021–2022 inflation, reflecting a roughly 22 percent rise in net income.

Yet, comparing the most and least profitable industries is revealing. The margins of the five most profitable industries (oil and gas extraction; mining and quarrying; petroleum and coal product manufacturing; transportation, postal and couriers’ services; and pipelines) increased by 7.6 percentage points, which amounted to an astonishing 185 percent growth in net income. By contrast, the average margin of the bottom five industries (alcohol, tobacco, and cannabis product manufacturing; agriculture, forestry, fishing, and hunting; publishing, motion picture, and sound recording, broadcasting, and information services; motor vehicle and trailer manufacturing; and basic chemical manufacturing) declined by 9 percentage points, an 88.4 percent loss in net income.

The profits of energy sector corporations can be volatile, as evidenced by the considerable decline in profit margins as economic activity slowed during the initial phase of the pandemic. Yet, as the study’s findings show, certain industries (petroleum and coal, for example) were in the top five pre- and post-pandemic. Across the board, as lockdowns ended, energy corporations’ profit margins surged and remained elevated, causing price pressure across the economy. “This rise in profit levels is significant for the top 5 group, which faced net losses during lockdowns, followed by a rapid rise in profitability leading the rise in the total non-financial industry margins post-lockdowns,” the authors conclude.

The profit margins of corporations in the food industry have also been notably above average during much of the post-pandemic period, though they weren’t quite as excessive as profits in the energy sector. The study finds that, “by the fourth quarter of 2022, margins for food stores were twice as large as before the pandemic (fourth quarter of 2019). This rise reflects a 23 [percent] increase in total revenues and a 21 [percent] increase in total expenses and a 155 [percent] increase in net income.”

However, it was in the energy sector where profits really took off. It is worth quoting the authors at length on this point:

The high energy prices documented during the first and second quarters of 2022 were last seen in 2008. Price levels during these two time periods were the highest recorded in Canada historically. As energy commodities are key inputs to production across industries, rising energy levels have meant rising costs across the board. From July 2021 to 2022, over half of the rise in the prices of major commodities sold by manufacturers in Canada was attributed to the increase in energy prices. The increases in total non-financial industry margins and reduction of the cost ratio between the second quarters of 2021 and 2022 was led by certain key sectors, including energy and mining, which are a part of the top 5 most profitable industries during this period. Excluding these industries, the total non-financial industry margin declined by 0.2 percentage points. Although a combination of global factors is at play leading to high energy prices, the result has been a continued rise in profit rates in the energy sector, alongside higher costs for consumers and other producers operating in non-energy sectors.

There we have it in a nutshell. Energy corporations have effectively been allowed to reap superprofits as the vast majority of Canadians are left to manage a cost-of-living crisis.

And what has been the response of policymakers? Tinkering around the edges with highly targeted tax rebates and laughable rental supports, while the Bank of Canada jacks up interest rates, which have made matters much worse by increasing the costs of housing through higher mortgage interest payments (which can also be transferred to tenants in the form of higher rents from landlords).

We shouldn’t allow the economic consequences of this policy failure to be forgotten. Millions of workers faced — and continue to face — a compounding cost-of-living crisis. While there is some evidence that a fight back has been underway since 2022, workers and unions have a long way to go to begin to regain what was lost in the post-lockdown inflation.