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Inflation question

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I don't know where this belongs, it's a question............I left school at 15 so not as clever as you lot so I have a question.....

There is a cost of living crisis because everything is going up so the government is going to raise the interest rate to try to control it.
But it's going up because the makers of stuff (or the owners or whatever) are charging more for it.

I heard on the news that supermarkets profits have gone up from millions to billions, as have the energy companies and fuel companies.
The prices for all of these things has gone through the roof (thus I guess causing inflation)

Now surely if the government put a cap on profit to millions instead of billions (they were ticking along nicely making millions before the cost of living crisis) prices could come back down, and inflation would be gone....
I know I am simplistic but please tell me why this can't be done.( I bet all the shareholders come and tell me this.).............
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  • The_Unready
    The_Unready Posts: 609 Forumite
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    Google 'free market' and capitalism as a starter for 10.
  • El_Torro
    El_Torro Posts: 1,505 Forumite
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    It’s been widely reported that energy companies are making crazy profits. Is the same true of supermarkets though? Especially when you look at the profit as a percentage of their turnover. 
  • Ectophile
    Ectophile Posts: 7,410 Forumite
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    Big multinational companies have years of experience making profits disappear in one country, and reappear in another company where taxes are lower.  They can run rings around any government.
    If it sticks, force it.
    If it breaks, well it wasn't working right anyway.
  • Archergirl
    Archergirl Posts: 1,774 Forumite
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    El_Torro said:
    It’s been widely reported that energy companies are making crazy profits. Is the same true of supermarkets though? Especially when you look at the profit as a percentage of their turnover. 
    It was mentioned online that their profits have increased to billions
  • El_Torro
    El_Torro Posts: 1,505 Forumite
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    edited 15 May 2023 at 10:01PM
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    El_Torro said:
    It’s been widely reported that energy companies are making crazy profits. Is the same true of supermarkets though? Especially when you look at the profit as a percentage of their turnover. 
    It was mentioned online that their profits have increased to billions

    I'm not going to look at every single supermarket but if we take Tesco as an example:

    In 2022 (February 2022 to February 2023) they made £56.4 billion in turnover
    Operating profit for the same period was £2.49 billion, so 4.4% of their turnover. 

    While this is only looking at one supermarket I don't see much evidence to suggest that supermarkets are benefiting from the current economic climate. For Tesco at least rising prices have meant an increase in turnover but a decrease in profit.

    If we compare this to Shell:

    Turnover from March 2022 to March 2023 was $392 billion.
    Operating profit for the same period was $40 billion, so 10.2%. 

    I couldn't find Shell's numbers in pounds, the important number is the percentage though. 

    We can argue about whether or not 10% profit to turnover ratio is excessive, though I would agree with many who say that it is excessive, bearing in mind that consumers and other companies are the ones paying the much higher prices for energy than we were previously. 


    FYI oil companies are currently paying a windfall tax in the UK. I wouldn't feel too sorry for them though, Shell are expecting to pay $500 million in 2023, which won't put a massive dent in their profits. 


    So to answer the original question: Yes, maybe oil companies should be paying more to subsidise the current situation. How much more and what impact this will have on those companies (which we do rely on) is up for debate though.
  • sevenhills
    sevenhills Posts: 5,938 Forumite
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    edited 15 May 2023 at 10:09PM
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    El_Torro said:
    El_Torro said:
    It’s been widely reported that energy companies are making crazy profits. Is the same true of supermarkets though? Especially when you look at the profit as a percentage of their turnover. 
    It was mentioned online that their profits have increased to billions

    I'm not going to look at every single supermarket but if we take Tesco as an example
    Or we could look at Tesco's, Sainsbury's and Shells  share prices, they were valued higher in 2018 than they are today.
  • El_Torro
    El_Torro Posts: 1,505 Forumite
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    El_Torro said:
    El_Torro said:
    It’s been widely reported that energy companies are making crazy profits. Is the same true of supermarkets though? Especially when you look at the profit as a percentage of their turnover. 
    It was mentioned online that their profits have increased to billions

    I'm not going to look at every single supermarket but if we take Tesco as an example
    Or we could look at Tesco's, Sainsbury's and Shells  share prices, they were valued higher in 2018 than they are today.

    Should their share price be taken into account when deciding how much windfall tax they should (or should not) pay? I think the company’s profitability is more relevant. 
  • sevenhills
    sevenhills Posts: 5,938 Forumite
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    El_Torro said:
    El_Torro said:
    El_Torro said:
    It’s been widely reported that energy companies are making crazy profits. Is the same true of supermarkets though? Especially when you look at the profit as a percentage of their turnover. 
    It was mentioned online that their profits have increased to billions

    I'm not going to look at every single supermarket but if we take Tesco as an example
    Or we could look at Tesco's, Sainsbury's and Shells  share prices, they were valued higher in 2018 than they are today.

    Should their share price be taken into account when deciding how much windfall tax they should (or should not) pay? I think the company’s profitability is more relevant. 
    It's difficult to put windfall taxes on international companies, Shell for example are listed on both the London and Dutch stock exchanges. Could they delist from London if taxes were too high?
  • booneruk
    booneruk Posts: 348 Forumite
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    edited 16 May 2023 at 8:22AM
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    El_Torro said:

    Should their share price be taken into account when deciding how much windfall tax they should (or should not) pay? I think the company’s profitability is more relevant. 
    Indeed! Share price and profitability aren't really linked (look at Ocado in 2020 for example). Also, if we start "windfall tax"-ing everything that makes a large profit we will start to become an economy that companies start to avoid. Windfall taxes aren't a long term solution, I'm increasingly uncomfortable with the way they're touted as one.

    Back to the OP's question - profit limits would do similar damage. Why isn't there a wage cap in the Premier League? Presumably because the top players would disappear to other countries.
  • MattMattMattUK
    MattMattMattUK Posts: 8,928 Forumite
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    There is a cost of living crisis because everything is going up so the government is going to raise the interest rate to try to control it.
    The Bank of England is raising interest rates, not the government. Whilst that is tied to their inflation target it is largely to protect the value of Sterling, if we did not raise interest rates roughly in like with the Fed and the ECB then Sterling would devalue further than it already has because of Brexit.
    But it's going up because the makers of stuff (or the owners or whatever) are charging more for it.
    Largely it is going up because of external costs, the main one being the increased cost of energy imports and food, though that feeds through the system into UK production costs, staff wages, operating costs for businesses etc. which all has to be factored in.
    I heard on the news that supermarkets profits have gone up from millions to billions, as have the energy companies and fuel companies.
    What you have heard is largely inaccurate, their profits have increased in terms of pounds, but in terms of percentages they are roughly in line with historical averages, They make around 4.5% on all operations, under 4% on grocery sales, higher on clothing, homewares and financial products. 
    The prices for all of these things has gone through the roof (thus I guess causing inflation)
    Most retail products are up around 10-20%, energy costs have increased by more but are not beginning to fall. Inflation is just a measure of the increases across the whole economy.
    Now surely if the government put a cap on profit to millions instead of billions
    It could cap profits and that would guarantee no inward international investment and capital flight from the UK, in short it would destroy our economy.
    (they were ticking along nicely making millions before the cost of living crisis) prices could come back down,
    This is a flawed position, their profits have not increased above historical averages, they are up slightly on 2020 and 2021 because they were hit with huge costs coping with Covid.
    and inflation would be gone....
    No it would not, inflation is there almost entirely because of three factors, the increase in importing goods, the devaluation of Sterling and the way that feeds into the wider economy. Capping profits at millions, or even banning supermarkets from making any profit at all would not change that, it would maybe reduce inflation 10.1% to 10%, that would be about it, however that would ignore that it would destroy the economy, so likely seeing inflation in excess of 100%, possibly seeing hyperinflation over 1,000%.
    I know I am simplistic but please tell me why this can't be done.( I bet all the shareholders come and tell me this.).............
    Way too simplistic, without understanding causes, how they impact the economy or the potential impacting of any mitigating action taken. 
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