The contribution of profits and production costs to price changes in the Polish economy

A recent discussion on the sources of inflation rise in the period 2022- 2023 highlights the role of non-labor components of GDP deflator, calling them profits. The aim of our analysis is to measure profits more carefully, separating them from the cost of capital and to assess their contribution to changes of different measures of prices in the economy. We show that material costs (and especially the prices of materials) are the most important source of variation of gross output deflator, responsible for over 50% of its variance in the period 1997-2022. The role of profits in general, and after the pandemic in particular, differs between various price measures. They are contributing high to the increases of value added deflator in the period 2021-2023, whereas their contribution to gross output deflator is muted. Labor costs (of which wages are relatively more important than unit efficiency of hours) are an important contribution to both output and value added deflators. The contribution of capital is less important, with a more balanced contributions of capital price and unit efficiency. Moreover, we stress that the most attempts to assess the role of profits in the evolution of prices are based on approximate decompositions. We show that the contributions calculated without the approximation error indicate a lower, although still significant, contribution of profits to price increases in the period 2021-2022. We also present how the cost (or profit) components correlate with prices and we highlight the differences in the role of various components across industries.