If you’ve seen the term “greedflation” used in news articles or by political figures lately, then you’re aware that many are concerned about rising profits as a key driver of inflation.

Such concern is not unwarranted. Profits in Canada are indeed at record highs. In the second quarter this year—that is, from May to June, which is the most recent data—overall corporate profits (before taxes) exceeded $153 billion. That is over 21 percent higher than the same period last year. And in the non-financial sector, which accounts for almost the entire increase, profits are up over 30 percent.

Some look at this and draw a simple conclusion: rising prices and inflation are made worse by corporate greed. The NDP leader Jagmeet Singh even calls for an investigation into grocery store chains, directly connecting rising profits in that sector to inflation.

“Corporate greed is a significant driver of inflation,” the party recently claimed.

A careful look at the data, however, reveals a very different story—as it often does.

It is of course true that firms exercising more market power could in principle fuel both inflation and profits. And profit margins (profits as a share of total revenue) in Canada’s non-financial sector are up. 

In the second quarter of 2021, for example, average profits were 7.6 percent of total revenue. In the second quarter of this year, profit margins increased to just under 9 percent. 

This is a large increase—with margins in the second quarter this year exceeding any other period on record—and one could easily conclude that this is an important driver of inflation. 

Had profit margins not increased, then a naive estimate suggests overall prices in Canada would be 1.2 percent lower.^{1The math doesn’t really matter, but if you’re curious I estimate this using changes in price-cost markups. Specifically, I estimate the markup as 1/(1 – profit margin). That is, if profits are ten percent of sales then the markup is 1/0.9, which implies prices are 11.1 percent above costs. I then hold markups fixed at Q2 2021 levels and estimate prices in Q2 2022.} Instead of inflation in the second quarter exceeding 7.5 percent, it would have been 6.2 percent. This implies roughly one-quarter of Canada’s unusually high inflation can be accounted for by rising profit margins.

It would be a mistake to end the analysis here, however.

A detailed look at individual sectors reveals a simple story behind these changes and also reveals why rising profit margins are not a driver of inflation. The same core driver of rising inflation, it turns out, is also causing higher average profit margins.

To see this, consider the mining, oil, and gas activities (including refining and petroleum product manufacturing) sectors. Together, they account for over 70 percent of the increased profit levels in corporate Canada—nearly $18 billion of the total $25 billion increase between Q2 2021 and Q2 2022. 

But this is not due to rising market power. The prices of commodities they sell are set on global markets. Producers in Canada are largely price takers and while they benefit from high prices they are not the cause of them. 

Outside of these areas, rising profits are entirely due to higher sales volumes rather than rising market power. Profit margins have been fairly steady at around 8 percent. I display these margins below, red for the second quarter of last year and blue for the same period this year.

Rising grocery prices—the focus of Mr. Singh’s attention—also does not reflect rising profit margins. In fact, food stores and food manufacturing both have lower profit margins this year than last. 

One can even see this in the financial statements of large food retailers. Loblaws, for example, reported a net profit margin of 3.04 percent in the second quarter of this year and 3.03 percent in the second quarter of last year. Their rising profits are due entirely to rising sales, not increasingly uncompetitive behaviour as some suggest.

The entire increase in average markups in Canada are therefore related to rising global energy and commodity prices. 

To be clear, this does not mean governments should not be concerned about profit margins in corporate Canada. Some sectors have significant domestic market power and likely charge higher prices than if more competition prevailed. Certain agricultural products (such as dairy), air transportation, telecommunications, and several other sectors, all benefit from high barriers to entry that governments deliberately enact. Liberalizing these sectors may, in the long run, be a source of lower prices. But while prices are higher than they otherwise would be, the change since last year—which is relevant for inflation rates—is immaterial.

One can also look at these developments and conclude that energy price regulations or windfall profit taxes are an appropriate response. We have seen that historically in Canada—most notably through the National Energy Program. This would indeed lower energy prices domestically, and therefore also lower measured inflation rates, but there are a whole host of other problems such intervention would create. The costs would almost surely exceed the benefits for Canada’s economy as a whole. But whatever one thinks of the merits of such policies, it is an entirely separate issue from understanding why inflation rates are rising.

There are of course important issues to explore and debate when it comes to the level of competition in certain areas of corporate Canada, and there are also many overlapping causes of rising consumer prices. But when it comes to claims that “greedflation” is a key driver of recently rising inflation rates, the data is very clear: it’s not.

On Thursday, the Chief of the Defence Staff (CDS), General Wayne Eyre, made a tacit acknowledgment of what most people in the Canadian Armed Forces (CAF) have long known—the military is in serious trouble and unable to sustain its current commitments in the present state. While it is easy enough to point at the depleted state of its core capabilities like aircraft and ships, the evidence of the crisis is evident everywhere. Just last week it was revealed that 4500 members and their families are on a waitlist for base housing, a basic necessity for many personnel’s lives. 

In most other countries, this would have been a major scandal with political leaders resigning. Yet it barely made a ripple in the press. While CDS Eyre has outlined a plan to fix the situation, there are serious doubts that he will be able to achieve this outcome, partly because the problem is so severe, and partly because he does not have the necessary tools to do so.

Many factors are behind how the CAF reached this inflection point. While COVID has been a major issue for retention, many of these trends far predate the pandemic. A key component is related to funding. Simply too little money has been spent on the department since the end of the Cold War, and it has now caught up to the military.

Recruitment is one such area and a major source of the personnel problems the military currently faces. Moreover, the department’s procedures and functions have become particularly problematic and had a detrimental impact on the lives of its soldiers. This is not a new challenge, as finding the balance to sustain the CAF during peacetime and war has been fought since the 1950s. 

However, many soldiers feel that their administration has become turgid and unresponsive to their needs—getting basic paperwork through can be difficult at times, housing is nearly impossible to obtain, and the cost of relocation, an unfortunate reality for many members, is far too high. Furthermore many aspects of cultural reform have been poorly implemented, despite the critical nature of this effort considering the systemic issues surrounding sexual harassment. But it has alienated members and risks further damaging already sagging morale. Large segments of the personnel are disenchanted and have become unwilling to continue in their roles. They simply cannot continue to sacrifice their own well-being or that of their families and have instead “voted with their feet” and left the forces.  

Particularly problematic is the capital base of the armed forces, from physical facilities to the actual planes, ships, vehicles, and the like. Everywhere one looks, the CAF is crumbling due to significant underinvestment. Moreover, the basic tools that soldiers need to conduct their mission are simply falling apart. 

For example, the Royal Canadian Navy’s frigates—12 vessels that constitute the vast majority of the navy’s ability to protect the country—are in a dilapidated state. The fleet is now roughly over twenty-five years old and starting to show its age after years of hard deployments worldwide. Seven of the ships are currently in yards undergoing refits or repairs, with two on, which means fewer deployments available for crews. Unable to serve on their assigned systems for too long, many sailors become disillusioned and leave the service. It’s a problem experienced by many within the CAF and not just limited to the Navy. 

While some individuals see too few deployments, others are often over-committed. Due to undermanning, a small number of key specialists are utilized unsustainably. Some individuals spend six or more months away from home, only to be sent away for another deployment six months later. In some of these roles, like aircraft maintainers or sensor technicians, undermanning has reached 50 percent of the authorized strength. These specialists burn out and leave the service, leaving fewer individuals to shoulder the burden and exacerbating the “death spiral.” Eventually, there will be nobody available to man these critical positions.  

Political representatives continually claim how they support the forces and point to policies and programs that purport to show just that. But this cannot disguise the plain reality that faces CAF members every day. The 2017 white paper Strong, Secure and Engaged was supposed to remedy these issues—yet the situation is fundamentally worse now than before. Money has not materialized, and even the recent announcement of a $5 billion infusion over the next six years only represents a two percent increase in the force’s budget a year. None of it is earmarked for areas that will improve serving members’ situations. Personnel are simply disenchanted by the whole situation, feeling that the government does not truly care about their institution. 

This is not the first instance of a similar crisis in living memory, however. In the mid-1990s, the CAF faced similar organizational pressures, albeit for different reasons. It was undergoing a drawdown from the end of the Cold War, even as it was undertaking unsustainable missions simultaneously in places like the former Yugoslavia, Rwanda, and Haiti. The National Defence leadership attempted to implement an operational pause in 1996. Despite their best efforts, the military was still sent out on additional missions, such as Canada’s support of the Stabilization Force in Bosnia and Herzegovina. It was only in the 2000s that the situation was temporarily stabilized, thanks to a major infusion of funding and support midway through the decade. 

A similar situation may negate General Eyre’s plans. Given the ongoing war in Ukraine and growing tensions in the Western Pacific around Taiwan, it’s easy to see a situation where the CAF may be called upon to send more troops into the world. This week it announced the deployment of 40 combat engineers to Poland in order to train Ukrainian soldiers, and it is easy to envision more soldiers being deployed in the future.

Simply put, there are no easy answers to this problem. What is needed, however, is for the government to provide strong leadership in order to fix this situation. Unfortunately, given this government’s seven-year track record on the defence file, this seems unlikely to happen. Actually reconstituting the military will be a costly enterprise, given the perilous state of the CAF. Moreover, rather than proscribing solutions that are completely out of step with the military culture, any reforms must focus on service-members needs to deal with them effectively. Pouring cash into this existing system will be highly inefficient and may even be counterproductive in the end. 

This all suggests that the CAF, and the government writ large, may require a more fundamental change to how foreign policy is guided, administered, and funded. The orthodoxy of today is clearly not working, and unless Canada makes a major change, the current situation will only worsen—to the point where we may become truly defenceless. And that is not in anyone’s interest.