Firms’ margins behaviour in response to energy shocks: Evidence from the UK

Abstract

How have profits behaved in the current period of sustained inflation? In part, the answer depends on how ‘profits’ are defined. Some broad measures suggest increasing profits, but conflate market and non-market sector dynamics and omit important corporate costs. This paper constructs an alternative measure of corporate profits to capture UK firm earnings in excess of all production costs. This measure has been declining since the start of 2022, consistent with evidence from historical energy shocks. This decline has not been uniform across firms, however: firms with higher market power have been better able to protect their margins; others have experienced large declines.