Profits in a time of inflation: some insights from recent and past energy shocks in the UK

Sophie Piton, Ivan Yotzov and Ed Manuel

How have profits behaved in this context of sustained level of 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. We construct 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 increase their margins; others have experienced large declines.

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How do firms pass energy and food costs through the supply chain

Hela Mrabet and Jack Page

The rise in commodity prices after Russia’s invasion of Ukraine had a direct and noticeable impact on consumers’ bills for energy and food. But firms also felt the brunt of higher costs. How did firms pass on these cost shocks through the supply chain and all the way onto consumer prices? How much and how quickly can firms pass through such large cost shocks? In this blog post, we combine information from Supply-Use tables with a rich industry-level data set on input and output price indices to shed light on these questions.

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Shining light on ‘shadow credit’ – what is Buy-Now-Pay-Later and who uses it?

Gerry Gunner and James Waddell

Buy-Now-Pay-Later (BNPL) is a relatively new form of consumer credit that you might have noticed as a payment option when shopping online or in person. However, there is little analysis in the public domain about who is using BNPL credit in the UK and its contribution to total household debt. We have used the Bank’s NMG Consulting survey to reveal that BNPL borrowers are typically younger adults and renters, and are more likely to report signs of financial distress.

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Forecasting near-term trends in the labour market

Harvey Daniell and Andre Moreira

The latest developments in the labour market are often central to monetary policy decisions. We outline a framework for mapping labour market indicators to near-term employment and pay growth, drawing on established insights from the ‘nowcasting’ literature. The key benefits of our approach are: the ability to map a range of ‘soft’ and ‘hard’ indicators of different frequencies to quarterly official data; the empirical determination of how much weight to place on each indicator; and the ability to shift those weights flexibly as more data become available. This framework beats simple benchmark models in our labour market application.

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A quick dive into SME finance

Kim Nyamushonongora and Oscar Spencer

99.9% of UK businesses are small and medium-sized enterprises (SMEs), employing 61% of the UK population. Yet, we know so much more about large businesses, how they function and particularly how they finance themselves. SMEs have been referred to as the backbone of economies around the world. Therefore, SME’s access to finance is systemically important. Using the SME Finance Monitor, a cross-sectional survey by BVA BDRC on 4,500 SMEs each quarter, we dive into how many SMEs use finance, what finance types they used prior to Covid and during Covid, what characteristics make them more likely to use finance and other relevant questions around SME financing. SMEs are defined as having 249 or less employees.

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Fuelling the tail: inflation- and GDP-at-Risk with oil-supply shocks

Marco Garofalo, Simon Lloyd and Edward Manuel

The economic consequences of the Russia-Ukraine war have brought the importance of sharp changes in commodity prices, such as oil, to centre stage. While many have focused on understanding the impact of these developments on the central projection for the macroeconomic outlook, this post investigates the balance of risks arising from oil-supply shocks, asking: could these lead to more severe or persistent changes in output growth and inflation, in rare events? Through the lens of a simple statistical model of Inflation- and GDP-at-Risk, we quantify the macroeconomic risks to inflation and GDP growth associated with (exogenous) changes in oil supply, showing that these shocks have more pronounced effects on the upper tail of the inflation distribution than at the centre.

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Risk perceptions and economic activity in the United Kingdom

Nicholas Vause and Carolin Pflueger

Recently, Pflueger, Siriwardane and Sunderam (2020) proposed a new measure of investor risk perceptions based on the cross-section of stock prices. Using that measure, they found that when risk perceptions are high, the cost of capital of risky firms is high and subsequently real investment and employment decline in the United States. In this post, we show that similar relationships exist in the United Kingdom. In 2023 Q1, the UK measure fell to its lowest level since the outbreak of the Covid pandemic, indicating higher risk perceptions and potentially foreshadowing weaker economic activity. This indicator may be helpful for policymakers, as it could serve as a useful measure of risk perceptions relevant for future economic developments and monetary policy.

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Bomadland: How the Bank of Mum and Dad helps kids buy homes

May Rostom

On average, parental contributions help children buy homes four years earlier than those without them. Out of every 100 new homeowners below the age of 30, 16 will have had help from ‘the Bank of Mum and Dad’, or Bomad for short. That rises to one in four new homeowners under the age of 25. Those who have had help from their parents put down a deposit twice as large, bought bigger first homes, and had smaller mortgage payments than those who did not. Anecdotes about cash assistance from Mum and Dad have recently been backed up by evidence from Legal & General, which implies Bomad plays a non-trivial role in the housing market. I attempt to investigate its prevalence.

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How have recent changes to the demand for workers affected the unemployment rate?

Tomas Key

During the recovery from the Covid pandemic, the demand for workers rose to unprecedented levels in the UK. The number of jobs that firms were looking to fill increased to 1.3 million in the middle of 2022, 60% higher than the level in the last three months of 2019. The amount of job vacancies has fallen substantially over the past year, but remains at a high level. This post discusses how those changes to the demand for workers have affected the unemployment rate. In particular, it outlines how an equilibrium model of the labour market can help to explain why there appears to have been a change to the relationship between job vacancies and unemployment in recent years.

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Unknown measures: assessing uncertainty around UK inflation using a new Inflation-at-Risk model

Nikoleta Anesti, Marco Garofalo, Simon Lloyd, Edward Manuel and Julian Reynolds

Understanding and quantifying risks to the economic outlook is essential for effective monetary policymaking. In this post, we describe an ‘Inflation-at-Risk’ model, which helps us assess the uncertainty and balance of risks around the outlook for UK inflation, and understand how this uncertainty relates to underlying economic conditions. Using this data-driven approach, we find that higher inflation expectations are particularly important for driving upside risks to inflation, while a widening in economic slack is important for downside risks. Our model highlights that rising tail-risks can become visible before a turning point, making the approach a useful addition to economists’ forecasting toolkit.

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