Do cost increases push up profit mark-ups? Evidence from Türkiye on profit inflation

The phenomenon of profit inflation has gained considerable attention in explaining the global surge in inflation following the pandemic crisis. Türkiye represents an important case study of cost shocks driving profit inflation. With its high dependency on imported inputs and volatile exchange rates, Türkiye has been experiencing chronic cost shocks and persistently high inflation rates. Due to these chronic problems, it is thought that the phenomenon of profit inflation is not limited to the pandemic period. In this context, this study utilizes balance sheet data from Türkiye’s real sector to analyze whether producer prices affect sectoral profit across 73 subsectors during the 2009-2023 period, employing the Panel-Corrected Standard Errors (PCSE) estimator. In addition, the findings are validated by Driscoll-Kraay's standard errors. The findings reveal that Türkiye’s real sector has not only preserved but also increased its profit margins in response to rising costs. Thus, it can be argued that profit inflation is valid for Türkiye in the relevant period.