Yesterday’s lower-than-expected 6.1% inflation outcome for the year to June contains some important information on inflation causes — and the stark lack of any way it can be controlled by either monetary or fiscal policy.
The obvious examples are petrol and food. Both are rising not because of high demand from consumers, but because of external factors. “The CPI’s automotive fuel series reached a record level for the fourth consecutive quarter,” the ABS said yesterday. “Fuel prices rose strongly over May and June, following a fall in April due to the fuel excise cut.”
Global energy prices and particularly oil prices are well outside the RBA’s control, and that of Treasurer Jim Chalmers.
So is the weather — food prices are up thanks to the floods and heavy rains along the east coast and the surge in prices of grains and oilseeds after the invasion of Ukraine.
The other big driver over the year was the rise in the costs of building houses. “Shortages of building supplies and labour, high freight costs and ongoing high levels of construction activity continued to contribute to price rises for newly built dwellings,” the ABS said. That is amenable to monetary policy with rising interest rates boosting the cost of mortgages and thus curbing demand.
Reflecting the supply chain problems and the impact of higher energy input costs for business, the ABS pointed out that the price of goods (up 2.6%) continued to rise more strongly than that of services (+0.6%). Supply chain disruptions were in part due to flooding and labour shortages mostly caused by COVID. Like the weather, the pandemic is beyond the direct control of the RBA and the government — although the reluctance of governments to mandate mask-wearing is making the ongoing impact of the pandemic significantly worse.
So other than construction, the problem of strong demand hasn’t featured heavily in any of these causes — nor that of surging wages.
What is noteworthy is the role of business profits in our inflation problem.
For more than a decade, the European Central Bank has been tracking different inputs to inflation in the eurozone — including that of profits. In May, an ECB executive examined the current surge of inflation and concluded:
Many euro area firms, though by no means all, have gained from the recent surge in inflation. The fortunes of businesses and households have diverged outside of the euro area, too, with corporate profits in many advanced economies surging over the past few quarters. Poorer households are often hit particularly hard — not only do they suffer from historically high inflation reducing their real incomes, they also do not benefit from higher profits through stock holdings or other types of participation.
The Australia Institute applied the same ECB methodology to Australia earlier this month and concluded:
For the three quarters of data available for 2021-22, encompassing the current uptick in the CPI, labour costs have played an insignificant role, accounting for only 0.6 percentage points of the 4.1 percentage point increase in the GDP deflator (15% of the total). Meanwhile profits have accounted for 2.5 percentage points of the increase in the GDP deflator (about 60% of the total).
Of course, the Australia Institute would say that — but its estimate echoes an analysis by an economist at the San Francisco Federal Reserve which found that less than one-third of monthly US core inflation, which excludes food and energy, is due to demand, and that the role of supply-driven inflation has grown noticeably in recent months.
What appears to be happening is that businesses are using the cover of higher inflation created by external circumstances — war, climate change, COVID — to increase prices even in the absence of higher input costs, in order to raise profits.
This wrecks the implicit trade-off of the past decade of wage stagnation engineered by business and the Coalition. Australian workers endured a decade of sub-3%, even sub-2%, wages growth, but at least faced very low inflation, meaning real wages didn’t go substantially backwards, just drifted slightly lower. Now businesses are hiking prices but workers are still only getting 2-something per cent wages growth, condemning them to large real wage falls. The shift from incomes to profits that has been a feature of the last decade is thus accelerating.
There hasn’t been much in the way of analysis of this from the RBA — strangely, the bank’s business liaison program hasn’t unearthed admissions of profiteering from corporations. But it’s there in the data — and it too is unlikely to be affected by the RBA’s assault on demand.
The “free market” system seems to work like this: those at the very top of the food chain refuse to accept lower profit in the face of any economic circumstances. No matter what. It’s just not an option. They pass the pain on down the line. The “wage rise leads to inflation leads to wage rise” cycle happens because of this intractable attitude, but only in the arena below the world of the oligarchs/billionaires, who remain untouched like the Gods on Olympus.
They have sold the public on the Catch-22 tenets that 1) when times are good, and inflation low, you don’t need a wage rise because…well, because times are GOOD,silly!…and 2) when times are bad, you can’t get a wage rise because you’ll create inflation and that’ll make things WORSE. So either way, all roads lead to Rome…there is no good time for a wage rise, apparently.
But has it always been this way? I seem to recall reading about a post-war era where things were very different, where the profits of productivity were more equally distributed, and everyone didn’t have to live in stasis for fear of releasing the inflation monster – and the wealth of billionaires wasn’t exponentially going off the charts like a new variant of Covid in a badly-ventilated nightclub.
A very good post there, Glenn. I agree with your sentiments entirely.
There is a certain irony in some of the points that you make (these points have been something of a mystery to me for quite a few years now). I was born a couple of years after World War II (1947) and for many of my early years when (as you point out) some things (not all) were rather more benign for working people, we had a fairly active Communist Party and a Labor Party which claimed to be a democratic socialist party.
Nowadays, when capitalism is running wild we, unfortunately, have neither of these parties. In fact, the ALP (while pretending to do otherwise), actually facilitates and enables the exploitation of working people and consumers by the capitalist class. But as Michael Smith quite correctly points out below, the poor, at some point, may well decide that they have had a gutful and kickback.
What will they kick back against & who will they trust and defer to, the LNP?
The Greens! It’s time!
The greens don’t want to compromise- much as we can hate it, not every Australian believes the same stuff- compromise has to occur-
They’ve never been the party of government. Their role has always been one of activism. Put them in government, and lets see if it transforms them. We go backwards with the Coalignition, and more slowly backwards under Labor. (Well, ok, forwards, but not fast enough!) It’s worth a try.
I personally like the way things are headed- and wish that Labor didn’t quite get the numbers- the major parties having to negotiate with Greens and independents-
I am sorry Drew but my crystal ball is a bit too fuzzy to allow me to answer that question with any degree of clarity.
Hey- don’t be too harsh, Labor have proposed many more policies that are working people friendly. Unfortunately, when you have fed the populace a property based investment strategy for so long, killing it overnight would be very detrimental to many. Cooling it down however, over time, Jim Chalmers does seem to have some credentials- and may not have to sell these out like Frydenberg did?
Correct. Somewhere along the line, probably around the time of Thatcher and Reagan, it was decided by the wealthy that greed is good, and possibly even ordained by god, and too bad if you cant participate. Its been a slippery slope for the powerless ever since but the crunch may be coming. At some point, refer any of several revolutions, the poor have a gutful and kick back.
Indeed. For the Wealthy are gods, and we the poor should worship them as encouraged by the Liberal Party and News Corp, among others. For the benefit of these luminous, pure, higher species, we should sacrifice a square meal, a fair day’s pay, any chance of decent accommodation, and possibly our firstborn. After all, if God truly loved the poor, He would have made them rich in the first place.
Yeah- not while Murdoch is feeding them a diet of resentment- somehow cured by voting right-
Yet we have politicians openly wondering why so many young people don’t think capitalism is all that it’s cracked up to be. “Must be those cultural Marxist teachers in public schools”, and not the appalling behaviour of businesses chasing more and more dollars. Let the environment suffer, let the planet warm, let species die, let workers be exploited, let consumers pay more for less. It’s a winning formula!
At a time when everyone is struggling, the mindset that “we can make them struggle even more to give better returns to shareholders” is a hair’s breadth from sociopathy. It’s a far cry from the efficient distribution of goods envisioned by Adam Smith.
I wonder when all the billionaires head off in their rocket ships to Mars, after destroying this planet, who they think are going to build their new world. It certainly won’t be them and they certainly won’t take any hoi poloi with them, will they?
Maybe the young, nubile, fertile ones – if the ending of Dr Strangelove is anything to go by.
Check out the ending of ‘Don’t Look Up‘ when the rich escapees finally reach their new Eden.
The Arianna Grande song is a perfect jab at C/C denialism.
Voting the B Ark* for the Billionaires.
* Golgafrincham Ark Fleet, Ship B
Are you telling me that there is not genuine competition maintaining the optimum pricing of goods and services. Crikey it’s the end of the World for capitalism. The only problem we can’t even get that right.
Unfortunately it’s not only the corporates that are profit increasing/ maintaining under the guise of ‘increasing input costs’ – small to medium businesses are following suit. It seems the decline in union presence (facilitated by on-going conservative government/ stakeholder/ donor advocacy and direct policy action) together with wage earners who have been conned into thinking wage rises are simply out of the question and/ or ‘unreasonable’ in the current times have sustained the super profits trend in business. Since business has had years of such profits it views these levels of return as ‘normal’ – no matter what the circumstances. Shame, shame, shame….
Trade off between profit and wage growth? When did that happen? Since 2013 there has been steady increase in profit taking a share of GDP and a steady decline in the labour share.
Except it hasn’t been steady, it’s been meteoric.