The Contribution of Profits and Labour Costs to Inflation in Sweden in the Short and Long Run

Abstract: 2022 saw a significant increase in global inflation that eroded the purchasing power of many households. Contrastingly, many firms saw an increase in profitability against public dissatisfaction. Stemming from this conflicting development, more research has attempted to test a possible association between profits and inflation. However, much of this research has focused on the U.S. This thesis is focused on Sweden and uses a descriptive statistical method to measure inflation based on movements in the GDP deflator over time. Using Swedish national accounts data, the GDP deflator is broken down into unit profits and unit labour costs to examine their impact on inflationary pressures in the short run between 2019-2022, as well as the long run between 1994-2022. Comparisons are also made to the European Union and the Nordic Countries. The main findings confirm previous research and point to a strong contribution of unit profits to inflationary pressures from 2019-2022. However, in the long run, the impact of each unit cost on the outlook of inflation varies. The findings of this thesis are important by pointing to a revaluation of dominating explanations that usually ascribe labour costs (wages) as the main driver of inflation.